Annual Report
and Accounts
2022
Regional property experts
STRATEGIC REPORT
Year In Numbers
Chairman’s Statement
Leading with our purpose
Looking forward
How We Work
Our Portfolio
Investment Case
Business Model
Strategy
Key Performance Indicators
Our Marketplace
Our Sectors
Operational Review
Strategy In Action - Disposal Completion
Strategy In Action - Asset Management
Top 10 Properties by Location
Top 10 Properties by Value
Strategy In Action - Strengthening the
Balance Sheet
Financial Review
Risk Management
Section 172 Statement
ESG Introduction
Working Responsibly - Our ESG Strategy
Our ESG - Environmental
TCFD - Being a responsible business
ESG - Improving the environmental
performance of our assets
ESG - Case studies
ESG - Future-proofing the portfolio
ESG - Social
GOVERNANCE
Corporate Governance Report
Governance overview
Board of Directors
Governance Framework
Board Composition and
Division of Responsibilities
Board Activities
Board activities and Committee attendance
Board performance evaluation
Nominations Committee Report
Environmental Social and Governance
Committee Report
Audit and Risk Committee Report
Directors’ Remuneration Report
Remuneration at a glance
Remuneration policy
Annual Remuneration Report
Directors’ Report and additional disclosures
Statement of Directors’ Responsibilities
Independent Auditor’s Report to the
members of Palace Capital plc
FINANCIALS
Consolidated Statement
of Comprehensive Income
Consolidated Statement
of Financial Position
Consolidated Statement
of Changes in Equity
Consolidated Statement
of Cash Flows
Notes to the Consolidated
Financial Statement
Company Statement
of Financial Position
Company Statement
of Changes in Equity
Notes to the Company
Financial Statements
Officers and Professional Advisors
Glossary
IFC
02
04
06
08
09
10
12
14
16
18
19
20
24
26
28
29
31
32
36
44
46
48
49
50
54
55
56
58
64
66
68
70
71
72
74
75
76
79
81
85
88
89
93
100
102
103
114
115
116
117
118
149
150
151
156
157
Our Performance: Summary
YEAR IN NUMBERS
Adjusted Profit Before Tax
IFRS Profit/(Loss) Before Tax
2022
2021
£7.8m
2022
£24.6m
£7.5m
2021
£(5.5)m
Total Property Return
EPRA NTA per Share
2022
12.5%
2021
1.0%
2022
2021
390p
350p
Total Accounting Return
Total Shareholder Return
2022
14.8%
2021
(1.2)%
2022
2021
21.1%
38.5%
Loan to Value
Dividends paid or declared
2022
2021
28%
42%
2022
2021
13.25p
10.50p
OPERATIONAL HIGHLIGHTS
• Disposal strategy ahead of target with £31.5m of gross proceeds achieved which
is 19% above March 2021 book value, 12% ahead of purchase prices and capital
expenditure, delivering an ungeared IRR of 11%
• 55 lease events completed in the period totalling 319,000 sq ft at an average of
11% premium to ERV
• An additional £1.9m of annualised net rental income gained in the year through
asset management lease activity, acquisitions, and reduction in non-recoverable
property costs. This takes into account income lost through disposals, lease expiries
and lease breaks
• Portfolio repositioning in the year has led to a higher quality portfolio consisting
of 37 properties, improved EPC ratings (which support future rental uplifts), higher
occupancy and weighting of core assets
• 98% rent collection for the 12 months to 31 March 2022
• Overall EPRA occupancy of 88.5% (2021: 86.4%), with majority of remaining
vacancy having been recently refurbished or identified for strategic refurbishment
or redevelopment
• WAULT of 4.7 years to break, 6.5 years to expiry, reflecting flexible lease terms
•
Increased prioritisation of ESG initiatives and incorporated energy efficiency
measures into our capital expenditure projects
V I S I T O U R W E B S I T E AT
W W W. PA L AC EC A P I TA L P LC . C O M
F O R R E P O RTS A N D P R ES E N TAT I O N S , G O TO
W W W. PA L AC EC A P I TA L P LC . C O M / I N V ESTO R S /
R E P O RTS -A N D - P R ES E N TAT I O N S /
F R O N T C OV E R : H U D S O N Q UA RT E R , YO R K
01
01
Welcome to
Palace Capital
We are regional property experts with
a diversified portfolio of UK commercial real estate
2022 SUMMARY
PORTFOLIO
Our year in numbers and operational highlights summarise a
We aim to provide a balanced portfolio of well located
strong performance for the Group in the year. We saw the gradual
properties comprising:
easing of lockdown restrictions in the UK and were well placed
to take advantage of this. We maintained our close relationship
with our tenants to maximise rent collection and completed our
York development. Our asset management strategy focused
on maximising the full potential of our properties, including
letting activity and consideration of the development and
refurbishment pipeline.
We are well placed to continue to perform well, as we focus on
our diversified portfolio in good locations and our commitment
to sustainable buildings which have strong ESG credentials, or
viable for improvement to create long term sustainable value.
•
•
•
c.50% core assets with medium or long term leases with high
occupancy and strong income profiles located where we see
rental and capital value growth;
c.40% value add /asset management assets where we
reinvest surplus capital to adapt our properties to occupier
demands; and
c.10% development assets where we identify potential to
undertake or divest at the right time for others to complete.
Total portfolio value
as at 31 March 2022
£259m
Number of assets
37
Contracted rent
£15.9m
Total occupancy
88.5%
WAULT
4.7Y
SECTOR SPLIT
3.8%
9.0%
9.1%
14.3%
16.7%
OFFICES
INDUSTRIAL
LEISURE
DEVELOPMENT
RETAIL
RETAIL WAREHOUSES
47.1%
22 Market Street, Maidenhead
01
01
STRATEGIC REPORT Chairman’s Statement
“Palace Capital has performed resiliently whilst
adapting quickly to ensure business continuity is
maintained in this challenging environment”.
Steven Owen
I am pleased to present
my first Chairman’s
Statement on the
results for the year
ended 31 March 2022,
following my appointment
to the Board on 1 January
this year.
A resilient
market
with Steven
Owen
INTRODUCTION
OVERVIEW OF RESULTS
Despite the uncertainty and volatility in
The Group has delivered a robust set
the economic environment over the last
of results over the last year driven by a
two years, the Group has performed
combination of active operational and
strongly with many of the key metrics
financial activity, property revaluation
showing a marked improvement in these
gains and profits arising from the disposal
results. The UK’s success in rolling out
strategy resulting in a total accounting
its Covid-19 vaccination programme and
return of 14.8% (2021: minus 1.2%).
thereby providing protection for the public
has translated into improved confidence,
which in turn has had a positive impact on
the portfolio. This has been evidenced by
strong letting activity and rental collections
returning to their pre-pandemic levels, as
people learn to live with the virus, get back
to their offices and enjoy leisure activities
The Group’s adjusted profit before
tax increased marginally to £7.8m
notwithstanding the dilution to earnings
caused by property sales totalling £31.5m
which realised a profit of £5.0m. Trading
profits from the sale of residential units
realised £3.8m.
once again. Furthermore, with a portfolio
The Group’s portfolio has demonstrated
comprising assets in town and cities across
resilience throughout the past year and
the regions, the Group is well placed to
combined with asset management activity
capitalise on the Government’s Levelling
and yield compression, generated a
Up agenda.
revaluation surplus of £8.2m, equivalent to
The Group has navigated the
17.7 pence per share.
unprecedented challenges that faced the
The aggregation of the profits described
economy and its business with the support
in the preceding paragraphs account for
of its tenants, banks and its employees. On
the significant increase in profit before
behalf of the Board, I would like to thank
tax reported under IFRS of £24.6m (2021:
all of them and other stakeholders for their
£5.5m loss).
support during the last year.
02
03
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 “The Group has
delivered a positive
set of results over
the last year driven
by a combination of
active operational
and financial
activity, property
revaluation gains
and profits arising
from the disposal
strategy resulting in
a total accounting
return of 14.8%.”
Principally as a result of the revaluation
surplus and profits arising from the
disposal strategy, EPRA NTA per share
increased by 11.4% to 390 pence per
share (2021: 350 pence per share).
TOTAL SHAREHOLDER
RETURNS
The Company’s share price increased from
236 pence per share on 31 March 2021 to
274p on 31 March 2022 which together
with dividends distributed produced
a Total Shareholder Return of 21.1%
(2021: 38.5%).
ENVIRONMENTAL, SOCIAL
AND GOVERNANCE (“ESG”)
The Company is committed to responsible
business and ESG matters, which are at
the forefront of the Board’s considerations.
Further details on the approach to
responsible business can be found in the
Annual Report and on the website.
BOARD CHANGES
Neil Sinclair, Chief Executive and Co-
founder, stepped down from the Board
with effect from 14 June 2022. Neil
considered this to be the right time to
step down following the strong trading
update announced on 6 April 2022 and
the material increase in NAV and dividend.
Neil, with Stanley Davis and Andrew
Perloff, co-founded the Company and
was instrumental in growing the business
OUTLOOK
The year ahead is likely to be further
affected by continuing macroeconomic
and geo-political uncertainty, particularly
arising from the continuing war in Ukraine.
The inflationary headwinds and the
consequential impact on consumer and
investor confidence are likely to constrain
UK economic growth in the short term. The
consequential risks to real estate owners of
such factors are understood and the Board
will continue to monitor the situation
regarding any impact on its business.
The Board announced in the Trading
Update on 6 April that, in consultation
with shareholders, it was considering
a range of strategic options to unlock
further value in the business. We expect to
update the market on the strategic options
that we will pursue before the Annual
General Meeting in July 2022. The Board
remains committed to maximising value
for shareholders and closing the current
share price discount to NAV.
Steven Owen
C H A I R M A N
The Group’s balance sheet has been
significantly strengthened following the
through a combination of corporate
and property transactions including
disposal of properties and the revaluation
moving from AIM to the Main Market
surplus resulting in a loan to value ratio
and conversion to a REIT. The Board
of 28% (2021: 42%). As at 31 March 2022
would like to thank him for his dedication,
the Group had cash and cash equivalents
commitment and contribution to Palace
of £28.1m and as at 10 June it was
£22.7m, excluding the £5.0m available
to immediately draw from the NatWest
revolving credit facility, which was repaid
post year end.
DIVIDEND
Capital since 2010. The Board and staff of
Palace Capital wish him well.
I, currently Non-Executive Chairman,
will assume the role of Interim Executive
Chairman with effect from 14 June 2022.
In December 2021, it was announced that
Stanley Davis, Chairman and Co-founder
The Group increased its paid or declared
of the Group in 2010, would retire from the
dividends by 26.2% to 13.25 pence per
Board on 31 December 2021. The Board
share (2021: 10.50 pence per share) in
would also like to thank Stanley for his
relation to the year ended 31 March
considerable service to the Company.
2022, including a proposed final fourth
quarter dividend of 3.75 pence per
share. The total dividend of 13.25 pence
per share is covered 128% by Adjusted
earnings per share.
02
03
STRATEGIC REPORT Leading with
our purpose
Our Strategic Report outlines what we do and how we
do it, and the key to this is our updated Purpose:
To provide compelling
and sustainable built
environments...
22 Market Street, Maidenhead.
COMPELLING AND
SUSTAINABLE BUILT
ENVIRONMENTS
We want our tenants to view our properties
as the best that they can afford for location,
convenience, facilities and their future
needs. This includes being sustainable in
providing them with the built environment
that takes into consideration environmental
factors in particular. It is a priority for us to
work with our tenants as partners to deliver
sustainable space for them now and in
Hudson Quarter, York
the future.
S E E PAG E 4 6 TO
R E A D M O R E O N O U R
ES G A P P R O AC H
04
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 WINNER
YORKSHIRE & HUMBER
Hudson Quarter
has been awarded winner in the category of
Commercial Development
This award honours an outstanding commercial
property development or initiative whether retail,
office, industrial or mixed-use
David Brooks Wilson
National Head Judge, RICS
Headline sponsor
...for people to thrive
for the benefit of all
our stakeholders.
FOR THE BENEFIT OF ALL
OUR STAKEHOLDERS
When our tenants are thriving, the knock-
on effect boosts our business and their
communities so that a whole network of
stakeholders benefit from mutual success.
PEOPLE TO THRIVE
Although our properties are physical
environments, we recognise the
importance of the people who use
them. We therefore want all our tenants
to get the best experience whether
working, visiting, or being part of the
local community fabric, creating a win-
win situation for all. A sound, supportive
environment provides occupiers with the
platform to perform at their best.
S E E PAG ES 4 4 A N D
4 5 TO R E A D
M O R E A B O U T O U R
STA K E H O L D E R S
05
STRATEGIC REPORT Repositioning
our portfolio
Looking forward
We are focused on acquiring high quality, income
producing assets with attractive rental growth
prospects and strong ESG credentials, that will
enhance the Group's earnings and dividend payouts.
S E E PAG E 4 8 F O R
O U R ES G ST R AT E GY
ACQUISITION STRATEGY
ESG CONSIDERATIONS
In tandem with our ongoing strategy and
ESG continues to be at the forefront of
recent disposals we are looking to recycle
our strategy in both asset management
our capital into investment opportunities
and acquisition/disposal. We want our
to reposition the portfolio for growth
buildings to have strong ESG credentials
in income and capital value. We are
(including at least EPC ‘B’) or alternatively
pivoting the portfolio weighting towards
buildings where it is viable to increase the
higher quality assets in the office and
sustainability credentials during the hold
industrial sectors. The intention is to use
period to match our ESG requirements.
our Core assets to provide a bedrock of
sustainable income.
PORTFOLIO WEIGHTING
Looking forward, our portfolio will
be structured to allow a balance for
higher return/risk properties, which can
provide stronger returns through active
management, by identifying opportunities
available in the regions which, in selected
instances in the Company's view, may be
currently mispriced.
The Company expects to balance the
portfolio with c.50% Core assets where
we see rental and capital value growth,
with the remainder split between Value
Add of c.40% and Development of
c.10%. At 31 March 2022, the portfolio
comprised 50% Core, 40% Value Add and
10% Development.
This realignment provides the backbone to
a progressive covered dividend policy.
St James' Gate, Newcastle
06
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Our investment criteria: helping us to focus our
portfolio and create long-term sustainable value:
01
Capital values
of £5m to £20m
02
Diversified portfolio
throughout focused
on office and
industrial
03
Location:
University towns and city
centres throughout England
(not Central London) with
good transport connections
and local government or
private sector investment
to support projected
rental growth
06
Open to off-market
corporate acquisitions
05
Comparison with
a select peer
group to ensure
we outperform
the market
04
ESG:
sustainable buildings with
strong ESG credentials that are
EPC ‘B’ or better, or are viable
for improvement to meet our
ESG requirements
07
STRATEGIC REPORT At a glance
How we work
We are a premium listed real
estate investment trust (REIT)
that has a diversified portfolio
of UK commercial real estate
in carefully selected locations
outside of London.
ACQUIRE
REFURBISH
We identify and buy strategically-located real estate
We revitalise assets, creating refurbished space that
outside London that fits our investment criteria.
meets occupational and environmental demands.
REDEVELOP
RECYCLE
We secure planning permission and financing to unlock
We regularly refresh our portfolio when optimum asset
value, creating excellent modern space.
value has been achieved or to capitalise on changes in
the investment market.
08
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Our portfolio
We measure performance on a total return basis with a core
portfolio of sustainable income-producing assets which
enables us to pay a progressive dividend, along with assets
with value-add initiatives to drive value enhancement.
22 Market Street, Maidenhead
Bank House, Leeds
Hudson Quarter, York
CORE/CORE PLUS
The core of the portfolio has medium/long leases, high occupancy
and a strong income profile, providing sustainable income to
fund dividends
50%
Target weighting and actual weighting
VALUE-ADD
We invest additional capital to drive rental and capital growth by
improving assets via refurbishment, ESG improvements, fit out or
adapting to suit occupier needs
40%
Target weighting and actual weighting
DEVELOPMENT
Within the investment portfolio, we identify potential development
opportunities, which will unlock significant capital growth over the
medium/long term
10%
Target weighting and actual weighting
09
STRATEGIC REPORT Investment
case
1 Invested in regional
commercial property
2 Total return
model
3 Entrepreneurial
approach
We see income and capital growth
We operate on a total return basis, so
We are entrepreneurial in our approach
in the regional property market as a
it is important for us to grow our capital
to property investment, evaluating
result of higher levels of employment,
values as well as income. We maintain
each opportunity on its own merits by
a core portfolio of sustainable income-
combining professional judgment with
producing assets to provide investors
market evidence and statistical analysis in
with an attractive dividend, through the
order to maximise returns for shareholders.
tax-efficient REIT structure. Furthermore,
we have the flexibility to reinvest surplus
capital to refurbish, reposition and
recycle property through value-add and
development strategies.
population growth and major
infrastructure investment.
Demand for industrial space continues as
the technology revolution continues, whilst
the return to the office presents a real
opportunity for the business to meet the
increasing demand for flexible, adaptable
and connected office space.
Portfolio Valuation
2022
2021
2020
2019
2018
£259.0m
£282.8m
£277.8m
£286.3m
£276.7m
Total Property Return Vs
MSCI Index
1 year
3 year
PCA 12.5%
1.0%
MSCI 19.6%
PCA 14.6%
MSCI 20.4%
64%
Office and industrial
(70% once the Hudson Quarter
residential apartments have been
sold and the HQ office is fully let)
Regency House, Winchester
10
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 4 Proactive asset
management strategies
We apply proactive asset management
strategies to unlock sustainable returns by
growing rents and improving occupancy.
Within our investment portfolio we identify
potential development opportunities
which, providing they are viable and meet
target returns, we will look to unlock over
the medium-term to deliver fit for purpose
real estate.
5 Regional expertise and
extensive relationship
network
The management team are regional
experts with exceptional market
penetration through their relationship
networks and extensive property and
financial backgrounds. They leverage
these to source transactions and deliver
real estate relevant to urban centres
outside London.
4.8%
Dividend yield
128%
Dividend cover
1 Dividends paid or declared for the year
ended 31 March 2022
Dividend Per Share1
2022
2021
2020
2019
2018
13.25p
10.5p
12.0p
19.0p
19.0p
8.5 Year Total Accounting Return vs peers
(EPRA NTA growth + dividends) now at 134%
Regency House, Winchester
180%
160%
140%
120%
100%
80%
60%
40%
20%
0%
Source: Arden Partners plc
Palace Capital Peer Group
11
STRATEGIC REPORT
Business
model
KEY RESOURCES
Our People
• Extensive regional property and financial expertise
• Substantial real estate experience
• Core values of being active, astute and ambitious, supported by strong
inclusive culture
• Entrepreneurial and proactive approach to property investment
Our Portfolio
• Majority is income, generating strong cash-on-cash returns
• Value-added and opportunistic assets with future growth potential
• Potential development pipeline within existing portfolio
• Lower risk focus in markets showing supply-demand imbalance and rental growth
Our Funding
• Balanced capital structure with appropriate LTV debt level
• Core portfolio creates surplus cash generation which in turn supports
covered dividends
• Sustainable cash returns
• Debt maturity matched to portfolio lease lengths
• Strong relationships with core UK clearing banks
WHAT WE DO
ACQ
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PORTFOLIO
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E L O P M E NT
V
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T I C D
S
O P P O R T U N I
E
L
C
R E C Y
UNDERPINNING EVERYTHING WE DO
Our Purpose
Our Values
To provide compelling and sustainable built
environments for people to thrive for the benefit
of all our stakeholders.
Active
Astute
Ambitious
12
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022
ACQ
UIR
E
E
L
C
R E C Y
R
E
F
U
R
B
I
S
H
P
O
L
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V
E
D
RE
PORTFOLIO EVALUATION AND MARKET INFLUENCES; DISPOSAL AND REINVESTMENT
Characteristics of disposals:
• Assets with limited growth prospects
• Non-core assets that don’t fit with our
primary strategy
• Changes in the market cycle, external
market trends and challenges that
could effect our assets
• Assets that are partly vacant, requiring
significant capital expenditure to let
Characteristics of reinvestment:
• Buildings which meet our stringent
and cautious approach but also
provide opportunities for rental and
capital growth
VALUE CREATED FOR ALL OF OUR STAKEHOLDERS
Investors
Communities
The environment
• We have a total return strategy, involving
•
increasing capital return as well as
income returns
• Ambition to outperform our sector peers
as measured against MSCI benchmark
Sustainably-built developments
and refurbishments
• Meeting current and future
regional demand
• Working with local authorities
• Helping reinvigorating city centres
• Continuous focus on upgrading
our portfolio and working with
tenants to protect the immediate
and wider environment
12.5%
189
Total property return versus MSCI
Index: 19.6%
no. of commercial leases
across portfolio
88.8%
EPC of A–D
in portfolio
11.2%
EPC of E–G
in portfolio
Tenants
Our people
• We create space for modern occupational
•
requirements of tenants
Strong values supporting fair reward
for company and individual successes
• We aim to ensure our refurbishments
• Annual bonus and long term incentive
and redevelopments are
environmentally efficient
plan opportunities
0.7%
EPC of F or G
in portfolio
319,000 sq ft
letting activity
S E E PAG ES 1 4 A N D 1 5 TO F I N D O U T A B O U T T H E M A R K E T D R I V E R S A N D K E Y T R E N D S T H AT
A FF EC T O U R P O RT F O L I O A N D H OW W E A R E R ES P O N D I N G TO T H O S E
13
STRATEGIC REPORTSTRATEGIC REPORT
Strategy
Our focus is on value creation
through our targeted acquisition and
stewardship of regional commercial
property
We invest across sectors outside London, based on fundamental
demand/supply macroeconomics supported by structural trends.
We focus on properties where we can enhance the long-term
income and capital value through proactive management
and strategic capital developments and refurbishments to
create desirable real estate that meets demand. We employ
a conservative financing strategy with debt aligned to our
property strategy.
S E E PAG ES 4 6
TO 6 0 TO R E A D
M O R E O N O U R
ES G A P P R O AC H
KPIs key
Principal risks key
1 Total Property Return (TPR)
1 Market Cycle
2 Total Shareholder Return (TSR)
2 Political and Economic
3 Total Accounting Return (TAR)
3 Capital structure
4 Adjusted Profit Before Tax
4 Liquidity
5 EPRA Vacancy Rate %
5 Portfolio strategy
6 LTV of Group Debt
6 Asset Management
7 Average Cost of Debt
7 Valuations
8 EPC ratings
8 Tenant Demand and Default
9 Dividend cover
9 Business Continuity and Cyber
10 People
11 Climate Change
12 Regulatory, Legal and Tax
14
01
REFOCUS OUR REGIONAL
PORTFOLIO
We are continuously reviewing
opportunities and disposals to
improve the property portfolio.
We have completed our disposal programme
ahead of book value. We will continue to
review our portfolio and monitor potential
disposals or acquisitions. We have a
conservative capital structure so are able
to access debt on attractive terms in order
to support acquisitions to support our total
return model.
Progress during the year
• Maintained a conservative
capital structure
• Observed the market intently and
built relationships with new and
existing investors
•
Enhanced our close relationships with
the banks
• Acquired one major asset
• Concluded the FY22 disposal
programme
Focus
•
•
Recycle capital from non-core
assets into core income enhancing
acquisitions focused on the office
and industrial sectors
Expand and maintain our relationships
with our main stakeholder groups
• Maintain conservative capital structure
to support potential investment
•
Reduce the share price discount to NAV
• Consider disposals
Link to KPIs
1 2 6 7 8
Link to risks
1 2 3 6 7 10
11 12
02
03
04
GENERATE ATTRACTIVE
MANAGE OUR ASSETS
BE A RESPONSIBLE
TOTAL RETURNS
EFFECTIVELY
COMPANY
Our long-term strategic
objective is to outperform
our peer group on a total
return basis.
We apply proactive asset
management strategies
balancing income generation
and capital expenditure value
enhancement activity.
We are committed to
conducting our business
responsibly taking into account
each of our stakeholder groups.
We measure ourselves against the MSCI
By recycling equity out of underperforming
We continue to embed ESG matters into our
industry benchmark.
To ensure we deliver on our strategy we
acquire assets across a range of risk/return
strategies from core to value-add, through to
opportunistic developments.
assets, we can deploy this into refurbishment
daily business practices and seek to operate
and other opportunities in order to reposition
in a way that provides a positive contribution
assets and meet occupational demand. We
to society and creates sustainable value for
have a good pipeline of assets which are well
our shareholders and stakeholders.
positioned for medium-term development.
Progress during the year
Progress during the year
Progress during the year
• Delivered a total shareholder return of
• Collected 98% of rent in the year,
• Worked with our ESG Committee and
21.1% and a total accounting return
completed 55 lease events
our external consultant to progress our
of 14.8%
• Disposed of 14 non-core assets for
ESG strategy
•
Total Property Return of 12.5% compared
£5.0m profit on disposal
•
Liaised with tenants throughout the
to the MCSI benchmark of 19.6%
•
Sale of 80 residential apartments at
Hudson Quarter, York. As at 13 June 2022,
84 residential sales have completed with
seven contracts exchanged or under offer
•
Reduced our void costs by £1.1m p.a.
• Undertook £5.5m of capital expenditure
across the portfolio to improve the rental
and capital value potential of our assets
•
Secured new office lettings on average
20% above the estimated rental value
Covid-19 pandemic, ensuring we offered
support to their business needs
•
Implemented ESG principles within our
asset management initiatives
•
Progress a TCFD reporting
Focus
Focus
Focus
• Secure lettings of the remaining
office space at Hudson Quarter, York
• Build on the engagement with our
•
Ensure ESG principles are considered on
tenants to further improve relationships
all our major capital expenditure projects
• Secure lettings including Newcastle
•
Identify assets where we can grow
and asset management initiatives
rental and capital values through asset
•
Retain, develop and support our
management initiatives
talented workforce
• Continue to work with our tenants to
support them and their requirements
and Manchester
• Sell the remaining residential
apartments at Hudson Quarter, York
• Grow recurring income through
lease renewals and re-gears and
reduce void costs
• Sustainably grow the dividend
Link to KPIs
Link to KPIs
1 2 3 4 5 6 7 8 9
4 6
Link to risks
1 3 5 6 12
Link to risks
1 3 4 5 8 10
Link to KPIs
2 6 7 8
Link to risks
1 2 3 4 5 6
7 8 9 10 11 12
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022
01
REFOCUS OUR REGIONAL
PORTFOLIO
We are continuously reviewing
opportunities and disposals to
improve the property portfolio.
We have completed our disposal programme
ahead of book value. We will continue to
review our portfolio and monitor potential
disposals or acquisitions. We have a
conservative capital structure so are able
to access debt on attractive terms in order
to support acquisitions to support our total
return model.
Progress during the year
• Maintained a conservative
capital structure
• Observed the market intently and
built relationships with new and
existing investors
•
Enhanced our close relationships with
the banks
• Acquired one major asset
• Concluded the FY22 disposal
programme
Focus
•
Recycle capital from non-core
assets into core income enhancing
acquisitions focused on the office
and industrial sectors
•
Expand and maintain our relationships
with our main stakeholder groups
• Maintain conservative capital structure
to support potential investment
•
Reduce the share price discount to NAV
• Consider disposals
Link to KPIs
1 2 6 7 8
Link to risks
1 2 3 6 7 10
11 12
02
03
04
GENERATE ATTRACTIVE
TOTAL RETURNS
MANAGE OUR ASSETS
EFFECTIVELY
BE A RESPONSIBLE
COMPANY
Our long-term strategic
objective is to outperform
our peer group on a total
return basis.
We apply proactive asset
management strategies
balancing income generation
and capital expenditure value
enhancement activity.
We are committed to
conducting our business
responsibly taking into account
each of our stakeholder groups.
We measure ourselves against the MSCI
industry benchmark.
To ensure we deliver on our strategy we
acquire assets across a range of risk/return
strategies from core to value-add, through to
opportunistic developments.
By recycling equity out of underperforming
assets, we can deploy this into refurbishment
and other opportunities in order to reposition
assets and meet occupational demand. We
have a good pipeline of assets which are well
positioned for medium-term development.
We continue to embed ESG matters into our
daily business practices and seek to operate
in a way that provides a positive contribution
to society and creates sustainable value for
our shareholders and stakeholders.
Progress during the year
Progress during the year
Progress during the year
• Delivered a total shareholder return of
21.1% and a total accounting return
of 14.8%
•
•
Total Property Return of 12.5% compared
to the MCSI benchmark of 19.6%
Sale of 80 residential apartments at
Hudson Quarter, York. As at 13 June 2022,
84 residential sales have completed with
seven contracts exchanged or under offer
• Collected 98% of rent in the year,
completed 55 lease events
• Disposed of 14 non-core assets for
£5.0m profit on disposal
•
Reduced our void costs by £1.1m p.a.
• Undertook £5.5m of capital expenditure
across the portfolio to improve the rental
and capital value potential of our assets
•
Secured new office lettings on average
20% above the estimated rental value
• Worked with our ESG Committee and
our external consultant to progress our
ESG strategy
•
•
Liaised with tenants throughout the
Covid-19 pandemic, ensuring we offered
support to their business needs
Implemented ESG principles within our
asset management initiatives
•
Progress a TCFD reporting
Focus
Focus
Focus
• Secure lettings of the remaining
• Build on the engagement with our
office space at Hudson Quarter, York
tenants to further improve relationships
• Secure lettings including Newcastle
•
and Manchester
• Sell the remaining residential
apartments at Hudson Quarter, York
• Grow recurring income through
lease renewals and re-gears and
reduce void costs
• Sustainably grow the dividend
Identify assets where we can grow
rental and capital values through asset
management initiatives
•
•
Ensure ESG principles are considered on
all our major capital expenditure projects
and asset management initiatives
Retain, develop and support our
talented workforce
• Continue to work with our tenants to
support them and their requirements
Link to KPIs
Link to KPIs
1 2 3 4 5 6 7 8 9
4 6
Link to risks
1 3 5 6 12
Link to risks
1 3 4 5 8 10
Link to KPIs
2 6 7 8
Link to risks
1 2 3 4 5 6
7 8 9 10 11 12
15
STRATEGIC REPORTSTRATEGIC REPORT Key performance
indicators
We measure our
performance using KPIs
linked to our strategic
priorities.
Where possible, we link our performance
to EPRA best practice recommendations,
recognised as industry standard measures.
We also consider that industry standard
measures, such as those calculated by
MSCI, are appropriate to use alongside
certain EPRA measures and others that are
relevant to our business.
Strategic aims
1 Refocus our regional portfolio
2 Generate attractive total returns
3 Manage our assets effectively
4 Be a responsible company
Remuneration aims
1 Fixed remuneration
2 Short term variable remuneration
3 Long term variable remuneration
ADJUSTED PBT
EPRA VACANCY RATE %
LTV OF GROUP DEBT
AVERAGE COST OF DEBT
TOTAL PROPERTY
The Company uses recurring earnings, stripping
out fair value movements and one-off items, as
the basis for establishing the dividend cover.
Vacancy rate of investment portfolio
measured against portfolio ERV.
Why we use this measure
To demonstrate the sustainability of
dividends paid.
Why we use this measure
Maintain strong occupier contentment
and retention.
Performance
Adjusted PBT increased in the year due to
successful asset management initiatives
driving rental growth (see note 6 on
page 128).
Performance
Increased lease activity led to a fall in our
vacancy rate to 11.5%. Our target is to
reduce this to under 10% to maximise
income and reduce costs.
RETURN (TPR)
Debt drawn less cash held as a fraction of
Average cost of debt drawn to finance
Total Property Return (TPR) is the total income
portfolio valuation.
investment portfolio.
and capital return as measured by MSCI.
Why we use this measure
To demonstrate our commitment to an
appropriate level of gearing.
Why we use this measure
To demonstrate financial efficiency by
maintaining lower cost of finance to
Performance
Disposals of investment and trading
properties have reduced LTV to 28%
(see note 18 on page 138).
We repaid variable rate debt in the year which
Strong asset management has driven
increased the proportion of fixed rate debt
earnings and capital growth resulting in a
increasing our average cost of debt.
TPR of 12.5%.
drive returns.
Performance
Why we use this measure
Our long-term strategic objective is to outperform
our peer group on a total return basis. This is the
industry benchmark across the UK.
Performance
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
8
7
6
5
4
3
2
1
0
8.0m
7.8m
7.5m
15
12
12.9%
13.6%
11.5%
9
6
3
0
42%
38%
28%
3.1%
3.0%
3.2%
12.5%
1.1%
1.0%
2020
2021
2022
2020
2021
2022
2020
2021
2022
2020
2021
2022
2020
2021
2022
Link to strategy 1 2
Link to strategy 1 2 3
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3
Link to remuneration 1 2 3
Link to remuneration 1
Link to remuneration 1
Link to remuneration 1
Link to remuneration 2 3
TOTAL SHAREHOLDER
RETURN (TSR)
TOTAL ACCOUNTING
RETURN (TAR)
Measures the performance of the Company
share price over the year including any
dividends paid in the period.
Total Accounting Return (TAR) is the total
net asset value (NAV) growth plus dividend
per share.
Why we use this measure
Actual market-based returns achieved by
an investor.
Performance
The share price increased by 16.1% in the year
whilst an increased dividend gave a total TSR
of 21.1%. It remains a key objective to reduce
the discount between NAV and share price.
Why we use this measure
This measure takes into account the actual
income return to shareholders measured by
dividends added to the underlying net asset
value growth.
Performance
We delivered shareholder value with an
increased dividend and EPRA NTA growth of
11.4% giving a TAR of 14.8%.
DIVIDEND COVER
RENTAL GROWTH
AVERAGE EPC RATING
VS ERV
E-G
Adjusted EPS divided by dividend per share.
Increase in net rental income above estimated
Reflects our ambition to improve our ESG
rental value (ERV)
performance.
Why we use this measure
To ensure that our dividends are covered by
current earnings.
Why we use this measure
To identify the underlying income growth
of the portfolio generated through asset
management.
Why we use this measure
We want to either develop, refurbish or sell
under performing assets based on our criteria.
Performance
Performance
Performance
The dividend paid in the year of 13.25p was
We have achieved an average uplift of 11%
We have refurbished or sold assets in the
covered 128% by adjusted earnings. The
on ERV on all lease activity throughout
year to reduce our holding of E, F and G
dividend was increased by 26.2% in the year.
the year.
rated property.
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
40
35
30
25
20
15
10
5
0
-5
-10
015
-20
-25
-30
-35
38.5%
21.1%
(30.9)%
2020
2021
2022
15
12
9
6
3
0
-3
-6
-9
14.8%
(1.2)%
(7.5)%
2020
2021
2022
156%
146%
128%
14%
11%
25.3%
24.3%
6%
11.2%
2020
2021
2022
2020
2021
2022
2020
2021
2022
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3 4
Link to strategy 1 2 3 4
Link to remuneration 2 3
Link to remuneration 2 3
Link to remuneration 1
Link to remuneration 2 3
Link to remuneration 2 3
16
50
40
30
20
10
0
100
80
60
40
20
0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
15
12
9
6
3
0
15
12
9
6
3
0
30
25
20
15
10
5
0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022
the basis for establishing the dividend cover.
Why we use this measure
To demonstrate the sustainability of
dividends paid.
Why we use this measure
Maintain strong occupier contentment
and retention.
Performance
Performance
Adjusted PBT increased in the year due to
Increased lease activity led to a fall in our
successful asset management initiatives
driving rental growth (see note 6 on
page 128).
vacancy rate to 11.5%. Our target is to
reduce this to under 10% to maximise
income and reduce costs.
8.0m
7.8m
7.5m
12
12.9%
13.6%
11.5%
TOTAL SHAREHOLDER
TOTAL ACCOUNTING
RETURN (TSR)
RETURN (TAR)
Measures the performance of the Company
Total Accounting Return (TAR) is the total
share price over the year including any
net asset value (NAV) growth plus dividend
dividends paid in the period.
per share.
Why we use this measure
Actual market-based returns achieved by
an investor.
Why we use this measure
This measure takes into account the actual
income return to shareholders measured by
dividends added to the underlying net asset
value growth.
Performance
Performance
The share price increased by 16.1% in the year
We delivered shareholder value with an
whilst an increased dividend gave a total TSR
increased dividend and EPRA NTA growth of
of 21.1%. It remains a key objective to reduce
11.4% giving a TAR of 14.8%.
the discount between NAV and share price.
38.5%
21.1%
(30.9)%
2020
2021
2022
14.8%
(1.2)%
(7.5)%
2020
2021
2022
8
7
6
5
4
3
2
1
0
40
35
30
25
20
15
10
5
0
-5
-10
015
-20
-25
-30
-35
15
9
6
3
0
15
12
9
6
3
0
-3
-6
-9
ADJUSTED PBT
EPRA VACANCY RATE %
LTV OF GROUP DEBT
AVERAGE COST OF DEBT
TOTAL PROPERTY
RETURN (TPR)
The Company uses recurring earnings, stripping
Vacancy rate of investment portfolio
out fair value movements and one-off items, as
measured against portfolio ERV.
Debt drawn less cash held as a fraction of
portfolio valuation.
Average cost of debt drawn to finance
investment portfolio.
Total Property Return (TPR) is the total income
and capital return as measured by MSCI.
Why we use this measure
To demonstrate our commitment to an
appropriate level of gearing.
Why we use this measure
To demonstrate financial efficiency by
maintaining lower cost of finance to
drive returns.
Why we use this measure
Our long-term strategic objective is to outperform
our peer group on a total return basis. This is the
industry benchmark across the UK.
Performance
Disposals of investment and trading
properties have reduced LTV to 28%
(see note 18 on page 138).
Performance
We repaid variable rate debt in the year which
increased the proportion of fixed rate debt
increasing our average cost of debt.
Performance
Strong asset management has driven
earnings and capital growth resulting in a
TPR of 12.5%.
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
2020
2021
2022
2020
2021
2022
2020
2021
2022
42%
38%
28%
50
40
30
20
10
0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3.1%
3.0%
3.2%
2020
2021
2022
15
12
9
6
3
0
12.5%
1.1%
1.0%
2020
2021
2022
Link to strategy 1 2
Link to strategy 1 2 3
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3
Link to remuneration 1 2 3
Link to remuneration 1
Link to remuneration 1
Link to remuneration 1
Link to remuneration 2 3
DIVIDEND COVER
RENTAL GROWTH
VS ERV
AVERAGE EPC RATING
E-G
Adjusted EPS divided by dividend per share.
Increase in net rental income above estimated
rental value (ERV)
Reflects our ambition to improve our ESG
performance.
Why we use this measure
To ensure that our dividends are covered by
current earnings.
Why we use this measure
To identify the underlying income growth
of the portfolio generated through asset
management.
Why we use this measure
We want to either develop, refurbish or sell
under performing assets based on our criteria.
Performance
The dividend paid in the year of 13.25p was
covered 128% by adjusted earnings. The
dividend was increased by 26.2% in the year.
Performance
We have achieved an average uplift of 11%
on ERV on all lease activity throughout
the year.
Performance
We have refurbished or sold assets in the
year to reduce our holding of E, F and G
rated property.
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
100
80
60
40
20
0
156%
146%
128%
14%
11%
15
12
9
6
3
0
6%
2020
2021
2022
2020
2021
2022
30
25
20
15
10
5
0
25.3%
24.3%
11.2%
2020
2021
2022
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3 4
Link to strategy 1 2 3 4
Link to remuneration 2 3
Link to remuneration 2 3
Link to remuneration 1
Link to remuneration 2 3
Link to remuneration 2 3
17
STRATEGIC REPORTSTRATEGIC REPORT
Our marketplace
Overview
THE REGIONS
We have established ourselves as a leading property REIT in the
regions outside of London, with a focus on university towns and
city centre locations, with good local and national infrastructure.
The release of the government’s White Paper and policies around
'Levelling Up' is supportive and backs our long-held belief that
regional disparities need to be addressed.
THE GOVERNMENT’S LEVELLING
UP AGENDA
In February 2022 the UK Government announced its long awaited
'Levelling Up' plan to address and close the gap between the rich
and poorest parts of the country. Investment in local transport
connectivity, telecommunications and placemaking has been
promised, which when implemented will improve the regeneration
and thereby the economic performance of regional cities. We are
experts at sourcing investment opportunities to align with these
initiatives to extract rental and capital growth.
Government has taken the lead by moving departments to
towns and cities across the Midlands and North of England. A
significant move across the markets we operate in was for HM
Revenue and Customs (HMRC) agreeing to lease 463,000 sq ft
in Newcastle at Pilgrim’s Quarter and BBC relocating to Salford
Quays, Manchester. The private sector has also contributed, such
as Channel 4 to Leeds and we believe others will follow suit in
due course.
POST COVID-19 AND THE FLIGHT
TO QUALITY
The success of the UK vaccination programme has aided the
government to actively encourage workers to return to working
from offices rather than home.
Occupiers remain uncertain as to what their long term
ESG
Real Estate is a major contributor to global emissions so ESG has
become central to strategies for both Landlords and Tenants.
ESG will be the focal consideration when investing in buildings
as all occupiers will demand good energy performance and low
emissions as well as engaging, adaptable and sustainable built
occupational requirements are and this has increased demand for
environments to satisfy their own ESG agendas.
flexible leasing. We expect that as companies return to working
from an office, corporate occupiers will be in a position to make
long term decisions.
The pandemic changed work patterns with hybrid working and
employers recognising they need to give more thought to the
working environment, both within the building itself and the
immediate locality.
There is a growing trend towards greater customer and employee
care, wellbeing facilities and collaboration space, leading to a
flight to quality which landlords are providing, ultimately leading
to higher rents.
In addition, it will be critical to any debt required as the cost of
borrowing will, we believe, be higher for those assets which do not
meet the minimum standards.
ECONOMIC INFLUENCES
A key concern in our investment strategy is the impact the UK and
global economy performance has. As we entered 2022 there were
strong indications that the world economy would power ahead in
its recovery from the pandemic. This has been halted for example
by a sharp rise in inflation and the war in Ukraine.
Global events are noticeably affecting the construction sector with
costs increasing and shortages of materials causing delays.
Despite this average wages in the UK continue to rise relatively
strongly and the UK labour market is strong. UK-wide job
vacancies have surged to record highs implying a further boost
to unemployment figures over the next few months. We expect
the majority of UK households and businesses to show positive
progress during the year.
18
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Our sectors
Overview
OFFICES
As businesses try to attract staff back to the office, demand in the
sector has been characterised by a clear emphasis on quality. Last
year has seen significant demand for Grade A space, with some
occupiers reducing their space requirements but committing to
improving the quality of their office accommodation.
What has become clear is that rent is less sensitive for better
quality space with a two-tier market evolving with secondary
accommodation increasingly more challenging to let. Tenants are
increasingly focusing on ESG and sustainability when considering
their occupational needs.
This focus on quality has limited Grade A supply levels and with
there being limited development pipeline in the majority of the
regions we operate in there is likely to be renewed pressure on
supply and potential for rental growth in the coming years.
Our office holdings, 47.1% of the portfolio, are in prime city centre
locations and our ongoing strategy through acquisition and asset
management is to provide quality accommodation with strong
ESG fundamentals to maintain occupancy levels and ultimately
rental growth.
19
INDUSTRIAL
The industrial sector continues to outperform the other sectors
with strong rental growth and yield compression predicted to
continue. The pandemic accelerated consumer adoption of online
commerce and this pattern has continued as shopping habits
continue to evolve, including 'last mile' logistics requirements.
Wider inflationary impacts on occupiers alongside the expected
transfer of business rates burden from retail to industrial property
in the next revaluation in April 2023 have the potential to slow
down rental growth however it is the provision of logistics
stock that is driving rents upwards and demand continues to
outstrip supply.
Our industrial holdings, 16.7% of the portfolio, have performed
well throughout the portfolio demonstrating strong rental growth.
LEISURE
With the lifting of government-imposed restrictions due to
the pandemic the public has returned to experience based
entertainment and food.
Our leisure assets, 14.3% of the portfolio, have echoed this
positive sentiment with three new lettings across our two schemes
in Northampton and Halifax during the last year. Our managing
agents report that trading for these occupiers is currently at 75%
of pre-pandemic levels.
RETAIL
Improving footfall, renewed occupier demand and the significant
yield gap between other sectors has resulted in strong investor
interest, albeit the focus remains on prime locations with
strong fundamentals. However current inflationary pressures
may influence investor and occupier confidence over the
coming months.
Making up 9.0% of the portfolio, we have no vacancy in this sector
and our holdings are in good locations with an annual rent of
£1.9m per annum.
RETAIL WAREHOUSING
High levels of essential retailers and comparatively low
occupational costs from typically multi-national covenants
has seen a reversal in the out-of-town retail occupational and
investment market following the pandemic.
High car parking provisions has proven ideally suited for click-
and-collect, customer returns and home deliveries with retail
warehousing increasingly acting as a bridge between online and
physical retail.
Our holdings, 3.8% of the portfolio, are located in the South
East, underpinned by strong land values and let to “essential”
occupiers and we expect to see continued rental growth in the
medium term.
STRATEGIC REPORTSTRATEGIC REPORT Operational Review
“ESG is fundamental to our strategy to create
a sustainable portfolio for the benefit of our
shareholders and the communities we invest in.”
Richard Starr MRICS
Executive Property Director
98% rent
collection
We are particularly pleased with three new lettings we achieved
at our two leisure schemes (Sol, Northampton and Broad
Street Plaza, Halifax), taking occupancy levels to 95% and 91%
respectively. Overall, the portfolio EPRA occupancy has increased
to 88.5% (2021: 86.4%).
We report in detail on our Disposal Strategy on page 24. The
objective was to improve the portfolio’s performance, recognise
the importance of ESG criteria and at the same time rebalance the
assets. The portfolio weightings are now 50% Core (2021: 28%)
with the remainder focused on value-add strategies which have
SUMMARY OF THE YEAR
The Covid-19 pandemic dominated the period with the asset
management team working tirelessly to maintain personal contact
the potential to generate greater returns.
with most tenants. Where needed we provided financial support
to deal with the drawn-out implications of lockdown and then
readjustment as occupiers dealt with unforeseen circumstances.
PORTFOLIO OVERVIEW
The strategy for the year was threefold; to ensure we maintained
our rent collection achieving 98% for the 12 months to 31 March
2022 (2021: 95%), secondly, to sell some non-core assets which
generated £31.5m at an average of 19% above the March 2021
book value and finally to reinvest in higher quality assets which
aligned with our growing focus on ESG. Collectively, these actions
have rebalanced the portfolio towards a more equal weighting of
Core and Value Add buildings.
ASSET MANAGEMENT
The pandemic placed a lot of focus on rent collection. We are
Following the recent disposal programme of carefully selected non-
core assets, the portfolio now comprises 37 buildings, compared
with 37 as at 31 March 2022 (2021: 48) with 164 occupiers
(2021: 182), which is now higher quality, with improved EPC ratings,
occupancy and increased weighting to Core assets.
Our diversified portfolio has had a focus on the office and industrial
sectors, which make up 64% of the total holdings (increasing to 70%
once the remaining Hudson Quarter residential apartments have
been sold). The remainder comprises residential at 9% (HQ York),
leisure at 14% and retail and retail warehousing at 13%.
Cushman and Wakefield independently valued the portfolio
as at 31 March 2022 at £259.0m, which is 3.9% higher than
proud of how we interacted with our tenants, working with them
31 March 2021 on a like-for-like basis. The industrial sector
to maintain income whilst supporting them where needed. More
performed the best, increasing by 20.8%, whilst our offices showed
detail on this is provided in the financial review.
a small decline of 0.9%. The retail, retail warehousing and leisure
Despite the various restrictions during the period, we completed
55 lease events (2021: 31) totalling 319,000 sq ft (2021: 230,000
sq ft). This generated an additional £1.9 million of annualised
net rental income. Lease activity and the associated reduction
in non-recoverable property costs generated £3.0m of income,
along with income generated from acquisitions of £0.7m. These
increases were offset by income lost through breaks and expiries
of £0.6m and income lost through disposals of £1.2m.
properties increased by 2.8%.
Portfolio value
Net initial yield
Reversionary yield
Contractual rental income
Estimated rental value
WAULT to break
EPRA vacancy rate
20
FY22
£259.0m
5.6%
7.5%
£15.9m
£19.4m
4.7 years
11.5%
FY21
£282.8m
5.6%
7.3%
£16.4m
£20.6m
4.8 years
13.6%
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 towns and city centres, that are well positioned for future growth.
Tenant
INVESTMENT STRATEGY
We identified (as part of an ongoing strategic review of all assets) a
number of our buildings where business plans had been completed
or income maximised. We anticipated that a number of these
buildings would not meet our increasing ESG criteria without
significant capital expenditure, which wouldn’t provide enough
shareholder return. We therefore embarked on a disposal strategy
which would improve the portfolio’s overall quality and increase
the average lot size, which cumulatively provides resilience to the
progressive dividend policy.
14 properties were sold for £31.5m at an average 19% premium
to March 2021 book value, producing an 11% ungeared IRR from
purchase, including any capital expenditure during the hold period.
We continue to strategically review our portfolio and individual
properties on an ongoing basis and anticipate further sales in
the coming year. Having prioritised our cash during Covid-19,
our disciplined acquisition strategy is focused on properties with
good ESG credentials (or viable potential), in regional university
In January 2022 we completed on the acquisition of 22 Market
Street, an office building in the centre of Maidenhead at £10.25m
reflecting a net initial yield of 6.83%. Newly refurbished with an
EPC B rating, the building added £0.75m per annum with excellent
potential for future rental growth. We continue to selectively identify
new investment opportunities as we look to recycle further capital
from the disposal programme and continuing residential sales at
Hudson Quarter.
HUDSON QUARTER, YORK
Our flagship development in York was completed on 20 April 2021
It comprises 127 residential units and 39,000 sq ft of Grade A,
BREEAM Excellent office space.
We sold 80 apartments (63%) during the year for a total of £27.4m,
enabling full repayment of £26.5m development loan facility, eight
months ahead of schedule. There remains strong interest from investors
and occupiers with four further completions, seven under offer to the
value of £2.9m and 36 remaining as at 13 June 2022. We expect this
interest to continue as we target being fully sold by 31 March 2023.
The HQ office is the only newly speculatively developed office building
within the historic city walls of York this century. As anticipated, we
have capitalised on the lack of competing stock with the letting success
proving corporate tenants will pay the market rent for buildings which
are high quality. We have let a total of 18,000 sq ft to Great Rail Journeys
and Redcentric Solutions at an average rent of £26 per sq ft on ten year
leases, surpassing the previously set record rent of £25 per sq ft with the
letting to Knights Solicitors.
It is testament to the quality of the development, and those
involved with its delivery, that Hudson Quarter has been
recognised an exemplar development whilst is has also had a
major positive impact in regenerating a key site within a sensitive
and historic setting. It has been shortlisted in ten prestigious
regional and national property awards, in both commercial
and residential categories, winning three so far. The scheme is
recognised as a “Gamechanger” at the Yorkshire Property Awards
and by the RICS for Regional Development of the Year. We are
also shortlisted for the Property Week residential awards.
21
The long term growth in York is positive with the redevelopment
of York Station, known as York Central with plans for over 1m sq
ft of office, retail and leisure properties and 2,500 homes. This
is purported to be one of the largest regeneration projects in
Europe covering 111 acres. With our property only two minutes’
walk away from York Station, we expect this regeneration to be
directly beneficial.
TOP 20 OCCUPIERS
Maintaining a close working relationship with all our tenants
has been fundamental to our asset management strategy since
inception. This groundwork meant we were able to engage with
all our occupiers easily during the pandemic which ultimately
protected our income.
Our top 20 tenants contribute 41% of our total passing rent and
over the period we collected 100% of their rent.
Location
Halifax &
Northampton
Industry
Leisure
Maidenhead
Power Tools
Milton Keynes
Auto
Northampton
Hotel
Newcastle
Charity
Coventry
Auto
Contracted
Rent pa
(£’000)
913
718*
544
510
487
432
Harlow
Technology
424**
Newcastle
Insurance
East Grinstead
Retail
Halifax
Car Parking
Leamington Spa Retail
409
401
345
294
York
Tour Operator
293***
Gosport
Retail
Sutton
Local Authority
Burgess Hill
Aviation
Halifax
Burgess Hill
Health
Retail
Milton Keynes
Construction
Leeds
Brighton
Central Bank
Charity
TOTAL:
291
283
280
262
246
240
232
219***
7,823
* Headline rent payable from March 2023
** Headline rent payable from February 2025
*** Headline rent payable from December 2022
STRATEGIC REPORTSTRATEGIC REPORT Operational
Review C O N T I N U E D
ESG
The UK real estate market is increasingly conscious of the need
for buildings and occupiers to fulfil sustainable criteria to reflect
the Paris Accord net zero targets. We are embracing the issue and
putting it at the centre of business strategy and we have engaged
with an external advisor to ensure we provide full transparency of
the risks within our portfolio relating to achieving a net zero target.
We are still collating data and set out further detail on progress to
date and our future on page 54.
Central to our strategy of building a sustainable and future
proofed portfolio with asset and portfolio management strategies
aligned, is improving our EPC ratings. Following implementation
of this policy the minimum rating within the portfolio is E (with the
exception of one listed property at F, 0.7% of portfolio). 88.8% of
our EPC's are rated A - D.
All asset management initiatives and capital expenditure are
heavily focused on ESG benefits which as an example should
reduce utility costs for occupiers.
New acquisitions undergo rigorous independent assessment of
existing ratings to verify that they meet our ESG criteria.
ACQUISITIONS
In January 2022 we completed the acquisition of 22 Market
Street, an office building in the centre of Maidenhead for £10.25m
reflecting a net initial yield of 6.83%. Newly refurbished with
an EPC B rating, the building added £0.75m per annum with
excellent potential for future rental growth. The tenant, Techtronic
Industries EMEA Ltd, a subsidiary of Hong Kong listed Techtronic
Industries, completed the lease in April 2021 with this becoming
their European HQ. With Maidenhead being located on the
newly opened Elizabeth Line (Crossrail) new major town centre
residential schemes have already been delivered and regeneration
is continuing apace with the £500 million mixed use Nicholson
Quarter scheme set to complete by 2025.
Richard Starr
E X EC U T I V E P R O P E RT Y D I R E C TO R
13 June 2022
Letting activity
£401,290
New
leases (22)
Lease
renewals (22)
Rent
reviews (11)
Rent pre-event
£1,738,510
ERV pre-event
12%*
£2,027,966
£1,322,720
£1,311,831
10%*
£1,449,071
Rent reviews
* Ahead of ERV
£586,514
£1,009,685
1%*
£1,026,753
22
22 Market Street, Maidenhead
OFFICES
INDUSTRIAL
LEISURE
DEVELOPMENT
RETAIL
RETAIL WAREHOUSES
SECTOR SPLIT
3.8%
9.0%
9.1%
14.3%
47.1%
16.7%
Our portfolio in March 2022
Portfolio value:
£259.0m
Number of properties:
37
EPC Rating A-D:
88.8%
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 We are focused on Regional Commercial Properties outside of London
We look to invest in regional commercial property where we can grow rental and capital values over the long term by
actively managing our assets, and carefully deploying capital to deliver attractive total returns.
OFFICE
INDUSTRIAL
LEISURE
RETAIL
RETAIL WAREHOUSE
Overview
47.1% of our portfolio is in this sector and accounts
for £7.5m p.a. in rent from 79 tenants in 19 buildings.
Top holdings by valuation at
31 March 2022
Investment summary
We continue to see rental growth in university towns
and city centre locations close to public transport links
and local amenities.
•
2/3 St James’ Gate, Newcastle
• Hudson Quarter, York
• Boulton House, Manchester
Overview
16.7% of our portfolio is in this sector and accounts for
£2.2m p.a. in rent from 22 tenants in seven buildings.
Investment summary
Last mile logistics continues to drive this sector.
Customers want their products delivered quickly and
this is leading many suppliers to seek distribution close
to city centres. We see a continuation of this trend.
Top holdings by valuation at
31 March 2022
•
•
Point Four Industrial Estate, Avonmouth
25/27 Blackmoor Road, Verwood
• Clayton Industrial Estate, Burgess Hill
Overview
14.3% of our portfolio is in this sector and accounts
for £3.5m p.a. in rent from 21 tenants in two buildings.
Top holdings by valuation at
31 March 2022
Investment summary
Negative sentiment about structural changes to
entertainment may be overstated. As Covid-19 related
restrictions ease, most are eager to socialise with others
and new concepts are replacing those brands that did
not adapt. We predict this sector is over the worst.
• Broad Street Plaza, Halifax
•
Sol, Northampton
Overview
9.0% of our portfolio is in this sector and accounts for
£1.9m p.a. in rent from 39 tenants in seven buildings.
Top holdings by valuation at
31 March 2022
Investment summary
Our units are in good locations with a mix of local
and national brands. We continue to work closely
with our tenants to ensure that their businesses are
able to trade.
• Aldi, Gosport
• Copperfields Centre, Dartford
•
Lendal/Museum Street, York
Top holdings by valuation at
31 March 2022
• Units A & B Bridge Park, East Grinstead
• Harnham Business Park, Salisbury
Overview
3.8% of our portfolio is in this sector and accounts for
£0.8m p.a. in rent from three tenants in two buildings.
Investment summary
A more resilient sector than had been anticipated
during the pandemic.
Increased demand for everything other than fashion
will drive improved returns for this sector.
Our holdings are located in the South East and
we expect to see continued rental growth in the
medium term.
23
STRATEGIC REPORTSTRATEGIC REPORT Strategy
in action
Disposal
completion
55%
Ungeared Total Return on
Disposal Strategy
Our portfolio continues to be under
constant review to ensure that assets
are recycled in order to maximise
shareholder return, whilst maintaining
a well-balanced portfolio.
24 BLACKWATER WAY,
ALDERSHOT
FRASER HOUSE,
STAINES
INDUSTRIAL
OFFICE
Purchase Price + Capex
Purchase Price + Capex
The disposal strategy identified 15 non-
core properties with an aggregate value of
at least £30m for disposal before the FY22
year end.
£0.8m
£1.1m
The key considerations included (but were
not limited to):
• Value maximisation through
completion of asset management
business plans
• ESG credentials (including EPC rating)
and cost to future proof
• Tenure, occupancy, sector and future
rental/capital growth prospects
• Lot size compared to the portfolio
average
Sale Price
Sale Price
£2.4m
£2.0m
Ungeared Total Return
Ungeared Total Return
536%
During the year the disposal strategy
was ahead of target with 14 out of the 15
Ungeared IRR
properties sold (average lot size £2.25m)
generating, in aggregate, £31.5m gross
proceeds which equated to an average
premium of 19% to March 2021 book
value, 12% to purchase price (including
37%
218%
Ungeared IRR
21%
capital expenditure) and delivering an
Asset Management
Asset Management
ungeared IRR of 11%.
Of the proceeds secured to date, £16.0m
has been allocated towards debt reduction
and fees, leaving £15.5m for redeployment
into properties that satisfy the Company's
acquisition criteria.
Strategic reviews and disposals of assets
will continue to be a core part of our
business strategy as we look to crystallise
returns and recycle capital into new
investment opportunities.
Originally purchased in 2013 as part of
The property was acquired in 2014 as
the Signal acquisition the adjoining long
part of the PIH portfolio . Being in regular
leasehold interest was also acquired
contact with our tenant we suspected
reducing the headrent. At the same time,
they would vacate in December 2021. A
we extended the lease to ten years with
detailed feasibility study was carried out
the tenant BHW Automotive at a 20%
which concluded the property required a
increase in annual rental. The property was
significant refurbishment and in particular
sold in November 2021.
additional capital expenditure to meet our
ESG criteria. It was clear this investment
would not give us the required returns
so the property was sold with vacant
possession at a significant premium to
book value in December 2021.
24
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 OFFICES
INDUSTRIAL
LEISURE
DEVELOPMENT
RETAIL
RETAIL WAREHOUSES
RUSSELL HOUSE,
WALTON ON THAMES
QUEENSWAY SHOPPING
CENTRE, BANBURY
BRITON HOUSE,
SOUTHAMPTON
INDUSTRIAL
RETAIL
OFFICE
Purchase Price + Capex
Purchase Price + Capex
Purchase Price + Capex
£1.3m
Sale Price
£2.7m
£1.2m
Sale Price
£1.7m
£4.4m
Sale Price
£4.1m
Ungeared Total Return
Ungeared Total Return
Ungeared Total Return
196%
Ungeared IRR
21%
80%
Ungeared IRR
16%
23%
Ungeared IRR
6%
Asset Management
Asset Management
Asset Management
Purchased as part of the PIH portfolio in
All five retail leases were extended
The building was 100% occupied by D
2014, this multi let asset was generally
during the Covid-19 pandemic to
Young & Co. throughout the hold period.
income producing throughout our hold
include minimum fixed uplifts. With an
Sale was completed following the expired
period. For many years it has been
improved WAULT of c.8.9 years to break
tenant break option at maximum WAULT
categorised as a potential development
and 10 years to expiry a sale of a non
and income.
so through active asset management the
core asset on completion of the lettings
lettings were structured on co-terminus
was completed to a private investor in
lease expiries to allow a redevelopment
January 2022.
opportunity. Planning advice restricted
many options so a sale to an owner
occupier (Travis Perkins) at a significant
premium to book value was completed in
December 2021.
25
STRATEGIC REPORTSTRATEGIC REPORT Strategy in action
Asset Management
Despite the prolonged
headwinds and impact
of Covid-19 and related
restrictions throughout
2021, our Asset
Management team
have continued to work
closely with existing and
prospective occupiers
and our advisors to
drive value through
leasing activity across
the portfolio.
Headline leasing activity includes:
• 55 lease events completed in the
period totalling 319,000 sq ft
(2021: 31 lease events totalling
230,000 sq ft) at an average of
11% premium to ERV
• 44 new leases and lease renewals
completed on 224,000 sq ft at a
premium of 14% to ERV
• 11 rent reviews completed on
95,000 sq ft at a premium of 15% to
the previous passing rents
• Portfolio EPRA occupancy of 88.5%
(31 March 2021: 86.4%)
• New lettings reduced our void costs by
£0.8m per annum and leasing activity
generated additional gross income of
£1.9m per annum
Ovest House, Brighton
OFFICE
Following a comprehensive refurbishment,
we completed a letting of the whole
building (5,500 sq ft) at £30.00psf to
Fedcap on a five year lease. This deal
represented a 50% uplift from the
previous average rental tone of £20.00psf.
Brighton
Harlow
Sandringham House, Harlow
OFFICE
We worked closely with key occupier Exela Technologies Ltd to manage
their expansion into the whole of the building (32,820 sq ft). A new full
repairing and insuring lease for a term of six years (three year break) at
£400,000 per annum was completed in November 2021.
Bank House, Leeds
OFFICE
Existing occupier 2-Work Group
Ltd expanded into an additional
13,465 sq ft bringing the 88,991 sq ft
asset to full occupancy. A planning
application is expected to be made
in summer 2022 for this asset to
increase the lettable floor area to
110,000 sq ft. The objective is to
create the best in class sustainable
landmark office building in Leeds
city centre.
Leeds
26
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Point Four Industrial
Estate, Avonmouth
INDUSTRIAL
The rent review with Eurocarb Products on
21,504 sq ft was at a 16% premium to ERV
and 33% uplift to passing rent. This rent
is already reversionary considering recent
lettings post the year end on the estate.
Avonmouth
Kettering
INDUSTRIAL
Following a comprehensive
refurbishment, 14,685 sq ft was let to
internet fulfilment business Prodbuy
Ltd at £80,000 per annum on a ten
year lease (five year break) with RPI
linked rent review. This brings the
asset to 100% occupancy.
Kettering
St Modwen, Plymouth
INDUSTRIAL
Lease renewal (ten year lease, five
year break) completed with SIG
Trading on 34,780 sq ft at a 10%
premium to ERV and 27% uplift to
the passing rent.
Plymouth
Northampton
Sol, Northampton
LEISURE
Following the common area
refurbishment (capital expenditure
c.£1.2m) we have completed new
lettings on 9,235 sq ft (50% of the
vacant space) of which 8,030 sq ft
was let to Community Health & Eye
Care Ltd, at a 24% premium to ERV.
These leases added a total rent of
£0.82m per annum. The scheme is
now 95% occupied.
Halifax
Broad Street Plaza, Halifax
LEISURE
One letting completed to a Food & Beverage operator, totalling 2,906 sq ft,
bringing the scheme to 91% occupancy and adding £0.1m per annum to the
annual rent. There are a number of rent reviews due in the financial year which we
anticipate will increase the overall property income by at least 5%.
27
STRATEGIC REPORTSTRATEGIC REPORT Top 10
properties
by location
OFFICES
INDUSTRIAL
LEISURE
RETAIL
RETAIL
WAREHOUSES
DEVELOPMENT
For indicative purposes only
St James’s Gate
Newcastle
Hudson Quarter
Broad Street Plaza
York
Leeds
Halifax
Manchester
Liverpool
Bank House
One Derby Square
Boulton House
Sol
Northampton
Milton Keynes
Point 4 Industrial
Avonmouth
Solaris House
Maidenhead
22 Market Street
28
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Newcastle
York
Leeds
Halifax
Manchester
Liverpool
Northampton
Milton Keynes
Avonmouth
Maidenhead
HALIFAX
Area – 117,767 sq ft
Rental income: £1.8m p.a.
Broad Street Plaza is a dominant city
centre leisure scheme anchored by a
ten-screen Vue cinema, TGI Fridays,
Wetherspoons and PureGym.
Distance from train station:
0.5m
12 min
NORTHAMPTON
Area – 189,203 sq ft
Rental income: £1.7m p.a.
Dominant city centre leisure scheme
incorporating a Vue cinema, Ibis hotel
and Gravity Fitness.
£1.2m of capital expenditure on
the common areas was completed in
May 2021.
Distance from train station:
0.2m
4 min
MANCHESTER
Area – 74,648 sq ft
Rental income: £1.0m p.a.
Boulton House is an eight-storey
office block in Manchester city centre
within walking distance of Piccadilly
mainline station.
Distance from train station:
0.3m
7 min
MAIDENHEAD
Area – 21,852 sq ft
Rental income (post rent free period):
£0.8m p.a.
Fully let, three storey office building
with EPC rating of B, acquired in
January 2022. Includes two small retail
units on the ground floor.
Distance from train station:
0.4m
4 min
AVONMOUTH
Area – 81,338 sq ft
Rental income: £0.4m p.a.
Multi-let industrial estate. Two vacant
units were let post year end bringing
occupancy to 100%.
Distance from train station:
1.1m
5 min
Top 10 properties
by value
NEWCASTLE UPON
TYNE
Area – 99,125 sq ft
Rental income: £1.3m p.a.
Multi-let office block in the city centre
with existing tenants including UBS
and The National Lottery.
Distance from train station:
0.3m
6 min
YORK
Area – 38,606 sq ft
Rental income: £0.3m p.a.
Hudson Quarter is a residential and office
development within York’s city walls
comprising 127 apartments and grade A
office space. Construction was completed
in April 2021. 23,000 sq ft was let during
the year.
Distance from train station:
0.1m
2 min
LIVERPOOL
Area – 70,161 sq ft
Rental income: £0.9m p.a.
City centre office and retail property
with tenants including Tesco, Pret,
Medicash and Exchange Chambers.
100% occupied and let.
Distance from train station:
0.5m
11 min
LEEDS
Area – 89,905 sq ft
Rental income: £0.7m p.a.
Multi-let city centre office building
let to tenants on short term leases
including the Bank of England.
22,000 sq ft of space was let during
the year.
Distance from train station:
0.1m
2 min
MILTON KEYNES
Area – 52,818 sq ft
Rental income: £0.8m p.a.
Three buildings are let to Rockwell and
BMI at low passing rents with potential
for rental growth.
Distance from train station:
2.9m
8 min
29
STRATEGIC REPORTSTRATEGIC REPORT “Maidenhead is highly accessible including
via the new Elizabeth line, and the town
centre is benefitting from significant
development and regeneration”
Tom Hood, Investment Manager
22 Market Street,
Maidenhead
Acquisition date
2022
Sector
Office
Rental income
£0.7m
EPC rating
B
Area
21,852 sq ft
30
30
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Strategy in action
Strengthening
the Balance Sheet
The success of our disposal strategy, alongside the
completion of Hudson Quarter, has allowed us to
strengthen the balance sheet considerably during the
last twelve months.
Through the disposal of 14 buildings we have repaid
£15.7m in bank loans which has helped improve
our gearing, whilst generating additional cash to
redeploy into improving our existing portfolio, as well
as supporting new acquisitions. This, combined with
the early repayment of the Barclays facility on Hudson
Quarter in November 2021, has reduced our debt
balance to £101.8m (2021: £128.3m). The repayment
of the Barclays facility has also been beneficial in
boosting cash receipts, as the proceeds from all future
HQ sales will be available for the Group to redeploy
as needed.
The disposal programme has provided the Group
with £15.5m in net proceeds. Alongside the Hudson
Quarter sales and strong rent collection in the year, we
have strong cash reserves at the year end of £28.1m
(2021: £9.4m). This has contributed to a reduction in
our LTV to 28% (2021: 42%), achieving our goal of
reducing LTV to below 40%. Post year end we reduced
our revolving credit facility by £5m.
The Maidenhead property was purchased for £10.3m,
with an EPC rating of B and headline income of
£0.75m p.a. on a WAULT of 4.3 years. This acquisition
fits with our strategy, as we have improved the
portfolio lot size, portfolio EPC ratings and core
weighting to strengthen the balance sheet further.
We have been able to reposition the portfolio to
improve the quality of assets we own. We have sold
buildings deemed to be value-add to allow us to
re-weight the portfolio towards core assets. This has
helped improve the EPC ratings across our portfolio,
with 88.8% of EPCs across the portfolio an A – D rating
(2021: 75.7%). With a shift to core assets, this has
also improved our average lot size of assets to £7.0m
(2021: £5.9m).
Loan to Value (LTV)
28%
31
31
STRATEGIC REPORTSTRATEGIC REPORT Financial Review
“The Group increased adjusted profit before tax
by 4.0% to £7.8m, and EPRA NTA per share by
11.4% to 390p”
Matthew Simpson Chief Financial Officer
A robust
performance
Loan to value
28%
FINANCIAL OVERVIEW
The Group increased adjusted profit
The £5.0m (2021: £0.9m) profit on disposal
before tax by 4.0% to £7.8m, and EPRA
of 14 commercial properties sold, the
NTA per share by 11.4% to 390p. The
£3.8m realised profit on the sale of 80
successful execution of the business
residential units at Hudson Quarter and the
strategy over the past 12 months has seen
fair value commercial property valuation
Total Accounting Return
the Group also grow the dividend, reduce
gain of £8.2m (2021: £14.8m loss),
14.8%
EPRA NTA increased by
11.4%
LTV and increase cash reserves, whilst
contributed to the IFRS profit before tax of
delivering a total accounting return (TAR)
£24.6m (2021: £5.5m loss).
of 14.8%.
The fair value revaluation gain has been a
The increase in adjusted profit before
result of the success of asset management
tax to £7.8m is largely due to asset
initiatives driving rental growth and yield
management lease activity and the reversal
compression, as confidence returned to
of the expected credit loss provision.
the market.
Adjusted earnings per share, which is
used as the basis to distribute dividends,
increased to 16.9p (2021: 16.4p), an
increase of 3.0%. The dividend paid or
declared increased by 26.2% to 13.25p
(2021: 10.50p), which was 128% cash
covered by earnings (2021: 156%).
32
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 FINANCIAL HIGHLIGHTS
Income growth
IFRS profit/(loss) before tax
Adjusted profit before tax
EPRA earnings
Basic EPS
EPRA EPS
Adjusted EPS
Dividend per share paid or declared
Dividend cover
Capital growth
Portfolio like-for-like value
Net Asset Value
Basic NAV per share
EPRA NTA per share
Total accounting return
Total property return
Total shareholder return
2022
2021
£24.6m
£7.8m
£7.4m
53.1p
16.0p
16.9p
13.25p
128%
3.9%
£177.2m
383p
390p
14.8%
12.5%
21.1%
(£5.5m)
£7.5m
£7.2m
(12.0p)
15.7p
16.4p
10.5p
156%
(4.0%)
£157.8m
343p
350p
(1.2%)
1.0%
38.5%
The summary of the Group financial results are as follows:
Net property income in the year increased by 27.5% to £19.0m
INCOME STATEMENT SUMMARY
Current year
£'millions
Prior year
£'millions
Net property income
Trading profit
Net rental income
Administrative expenses (excl. SBP)
Net finance costs
Adjusted profit before tax
Gain/(loss) on revaluation of
investment property portfolio
Profit on disposal of investment
properties
Trading profit
Fair value gain/(loss) on interest
rate derivatives
Corporation tax
Development loan interest
Share based payments
Loss on disposal of equity
investments
Debt termination costs
Impairment of trading properties
Gain on listed equity investments
IFRS earnings
19.0
(3.8)
15.2
(4.4)
(3.0)
7.8
8.2
5.0
3.8
0.3
(0.1)
(0.2)
(0.1)
(0.1)
(0.1)
–
–
24.5
(2021: £14.9m). This was driven by the £3.8m trading profit
from the sale of residential units at Hudson Quarter. Increased
rental income generated from significant lease activity and the
acquisition of Maidenhead was offset by income lost due to the
timing of disposals in the year.
Non-recoverable property costs increased to £2.6m in the year
(2021: £1.5m), driven largely by the introduction of vacancy costs on
the completion of Hudson Quarter offices. The Group's EPRA cost
ratio (excluding non-recoverable property costs) reduced to 24.4%
(2021: 30.6%) but including non-recoverable property costs marginally
increased to 39.4% (2021: 39.2%). The total expense ratio was 1.6%
(2021: 1.4%). Administrative costs (excluding share-based payments)
14.9
–
14.9
(4.1)
(3.3)
7.5
(14.8)
increased to £4.4m (2021: £4.1m). The increase was due to the
recruitment of a new chairman, appointment of an ESG consultant
and an increase in compliance, regulatory, advisory and payroll costs.
Finance costs reduced by 3.0% to £3.2m (2021: £3.3m), which was
driven by the reduction in Group debt repaid throughout the year.
In accordance with IFRS 9, in relation to the expected credit loss,
we have assessed the risk of recoverability of our rental arrears.
We reversed £0.4m of rental arrears from trade receivables to
the income statement in the financial period. This was due to an
improved assessment of risks, as rent collection returned to pre-
pandemic levels and tenant financial covenant health improved as
the economy recovered.
1.0
–
(0.3)
–
–
(0.3)
–
(0.1)
0.8
0.7
(5.5)
33
STRATEGIC REPORTSTRATEGIC REPORT Financial
Review C O N T I N U E D
Total demanded
Total collected
Concessions/deferrals
Outstanding excluding payment plans
Current collection rates
Quarter
starting
Mar 21
£m
Quarter
starting
Jun 21
£m
Quarter
starting
Sep 21
£m
Quarter
starting
Dec 21
£m
Year ended
31 Mar 22
£m
4.1
3.9
0.1
0.1
4.2
4.2
–
–
4.2
4.1
–
0.1
3.9
3.8
–
0.1
98%
99%
98%
98%
16.4
16.0
0.1
0.3
98%
The March 2022 quarter rent collection rates remain robust at 98%, displaying a continuation of the strong rent collection seen
throughout the year.
SHAREHOLDER VALUE
EPRA NTA increased by 40 pence per share or 11.4% to 390p (2021: 350p) during the year. This was driven largely due to the revaluation
surplus of £8.2m, or 17.7 pence per share, the profit on disposal of non-core assets of £5.0m, or 10.7 pence per share and the £3.8m
profit on completion of the 80 Hudson Quarter residential units in the year, or 8.2 pence per share. Net adjusted earnings, after dividends
paid contributed an additional 5.2 pence per share.
The EPRA NTA return for the year, including dividends paid in the year, was 51.7 pence per share or 14.8% (2021: minus 1.2%). It
remains a key focus of the Company to reduce the share price discount to EPRA NAV. The Company share price increased from 236p
on 31 March 2021 to 274p on 31 March 2022, which together with dividends distributed, produced a total shareholder return of 21.1%
(2021: 38.5%).
EPRA NET TANGIBLE ASSET BRIDGING CHART
EPRA NTA per share movements in the year
410p
400p
390p
380p
370p
360p
350p
340p
330p
320p
16.9p
350p
8.2p
2.0p
(11.7p)
(3.8p)
10.7p
17.7p
390p
EPRA NTA
at 31 March
2021
Adjusted
earnings
Property
revaluation
movements
Sale of
non-core assets
Trading profit
Fair value adj.
of trading
properties*
Cash dividends
paid
Other
movements**
EPRA NTA
at 31 March
2022
* Hudson Quarter York residential development is carried in the books at lower of cost and net realisable value (NRV) and as the NRV was higher than the
cost at 31 March 2022, EPRA NTA adjusts for the variance
** Other movements includes movement in treasury shares, cost of derivatives, debt termination costs, non-recurring loan interest, disposal of listed equity
investments and the effect of increased number of shares in the year
***Dividends equals dividends paid or declared in relation to the year ended 31 March 2022
34
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Set out below is a table showing the movement in gross debt
Pence per
share
during the year:
Drawn debt at 31 March 2021
Repayment of development loan
Repayment of debt through disposals
Amortisation of loans
Debt drawdown
Drawn debt at 31 March 2022
2022
£m
128.3
(20.6)1
(15.7)
(1.7)
11.5
101.8
1 At 31 March 2022 the development loan balance was £20.4m and during
the year a further £0.2m of loan interest was capitalised.
There have been no new debt facilities in the year. Given
the economic climate of increasing inflation, with interest
rates expected to rise, we continue to monitor swap rates.
At the 31 March 2022 we held £61.4m of fixed or hedged
debt (2021: £62.6m), which was 60.3% of overall drawn debt
(2021: 49%), as shown in the table below:
DEBT
Barclays
NatWest
Santander
Lloyds
Scottish Widows
Fixed
£m
Floating
£m
Total
drawn
£m
Years to
maturity
33.8
–
18.6
–
9.0
61.4
(4.6)
32.0
6.2
6.8
–
29.2
32.0
24.8
6.8
9.0
40.4
101.8
2.2
2.4
0.3
0.9
4.3
1.9
The Group's key debt metrics are summarised in the table below:
31 March
2022
31 March
2021
28%
£101.8m
£61.4m
3.2%
1.9yrs
2.9yrs
3.9x
41%
42%
£128.3m
£62.6m
3.0%
2.6yrs
–
3.7x
74%
DEBT METRICS
Net loan to value ratio
Debt drawn
Total fixed debt
Average cost of debt
Average debt maturity (yrs)
Post year end average debt
maturity (yrs)
Net interest cover
NAV gearing
Matthew Simpson
C H I E F F I N A N C I A L O FF I C E R
13 June 2022
EPRA NTA MOVEMENT
EPRA NAV AT 31 MARCH 2021
Adjusted earnings before tax
Property revaluation movements
Disposal of non-core assets
Trading property profit
Fair value adj. of trading
properties
Shares issued
Cash dividends paid
Derivative costs
Taxation
Development loan interest
Sale of listed equity investment
Debt termination costs
£m
161.3
7.8
8.2
5.0
3.8
1.0
0.1
(5.4)
(0.7)
(0.1)
(0.2)
(0.1)
(0.1)
EPRA NAV AT 31 MARCH 2022
180.6
350
16.9
17.7
10.7
8.2
2.0
(1.0)
(11.7)
(1.5)
(0.3)
(0.4)
(0.3)
(0.3)
390
FINANCING
It has been a core discipline, since the start of the pandemic, that
the Group maintains an appropriate capital structure. The support
from our banks has ensured that we have remained covenant
compliant on all facilities over the past 12 months, with only a
waiver obtained in April 2021 for the Scottish Widows facility.
The Group’s drawn debt reduced by £26.5m to £101.8m at year
end (2021: £128.3m). There were two facilities due to mature
within one year. Post year end, the Group refinanced the facility
with Santander, reducing the margin from 2.5% to 2.2% on a new
five year facility, whilst also extending the current debt facility
with Lloyds for a further year until March 2024. The average debt
maturity decreased to 1.9 years (2021: 2.6 years), though this has
extended post year end to 2.9 years as at 13 June 2022 on the
refinancing of the two facilities stated above.
Since November, all disposal proceeds from the Hudson
Quarter residential scheme have enhanced cash reserves. At
31 March 2022 the Group’s cash and cash equivalents was £28.1m
(2021: £9.4m). This included £5.0m drawn from the NatWest
revolving credit facility. As at 10 June 2022, the cash balance
was £22.7m, excluding the £5.0m available to immediately draw
from the NatWest revolving credit facility, which was repaid post
year end.
Net debt at 31 March 2022 was £73.6m (2021: £118.9m) which
resulted in a significant reduction in the loan to value (LTV) ratio
to 28% at the year-end (2021: 42%). The main driver was the
repayment of the outstanding development loan facility of £20.6m
with Barclays, which was paid eight months ahead of schedule in
November 2021, and the repayment of £15.7m of debt from the
proceeds of the disposal program announced at the beginning of
the FY22 financial year. The total cost of debt increased slightly to
3.2% (2021: 3.0%).
35
STRATEGIC REPORTSTRATEGIC REPORT Risk
management
RISK FRAMEWORK
The Board has overall responsibility for ensuring that an effective
system of risk management and internal control exists within the
business and confirms that it has undertaken a robust assessment
of the Group’s emerging and principal risks and uncertainties.
Risk management is an inherent part of the Board's decision
making process. This is then embedded into the business and its
systems and processes. The Board reviews its overall risk appetite
and regularly considers, via the Audit and Risk Committee,
the principal risks facing the company, managements plans
for mitigating these and emerging risks. The Committee also
considers, at least annually, the effectiveness of the Company's
system of risk management and internal control. Further
EMERGING RISKS INCLUDING CLIMATE
CHANGE
A prolonged bout of Covid-19, new variants or further pandemics
may lead to further imposition of controls on the movement
of people and interruption of large parts of the economy for a
significant period. This could result in further economic disruption
with continued uncertainty, reduced market confidence, volatile
market valuations and pressure on our rental income.
Cyber threats, technological advancements and the potential
impact on operations are increasing for all businesses and were
further heightened as working from home became vital in the fight
against Covid-19. We took steps to increase our security measures
and continue to review ways in which we can further mitigate the
information on the work of the Committee in this area is available
risk to our network and data.
in the Audit and Risk Committee report on page 81.
Our approach to risk identification and our open and supportive
culture means that asset managers and key individuals in
the finance team are able to report directly and at an early
stage on issues, allowing management to take appropriate
mitigating action.
COVID-19
A number of risks were heightened as a result of the Covid-19
pandemic. Although these have thankfully reduced over time,
we kept matters under regular consideration by the Board
and management on, for example, rent collection, compliance
with banking covenants and the overall approach to tenant
engagement.
Climate change is a local and global issue which presents both
risks and opportunities to the commercial real estate market,
with the potential to adversely impact the macroeconomic
environment as well as our own operations and those of our
supply chain. Demand for sustainable buildings is increasing
across all stakeholder groups with evolving regulation in the built
environment. Like many other companies, we have determined
that Climate Change is now a Principal Risk. The Board’s ESG
Committee is tasked with overseeing the Group’s response to
climate change and further information can be found on pages 79
to 80.
GOING CONCERN STATEMENT
The Directors regularly assess the Group’s ability to continue as a
going concern. The Strategic Report sets out in detail the Group’s
financial position, cash flows, liquidity position, borrowing facilities
and the factors which will affect future performance. Given the
ongoing economic disruption and uncertainty caused by rising
inflation and rising interest rates, the assessment of the Group’s
ability to continue in operation has been undertaken, with due
Hudson Quarter Offices, York
36
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 consideration given to the Group’s cash resources, borrowing
facilities, rental income, acquisitions and disposals of investment
properties, committed capital expenditure, Hudson Quarter sales
and dividend distributions.
DOWNSIDE SCENARIO
The Directors have considered various downside scenarios in
assessing the Groups’ ability to continue as a going concern.
Sensitivity analysis and reverse stress testing were undertaken on
all these scenarios, to assess the impact on the business and in
particular the loan covenants.
The downside scenario assumptions used in the assessment
included:
• 15% reduction in rent collection from our two leisure assets
“The Group increased its total
annual dividend paid or declared
for the year by 26% to 13.25p, fully
covered from rental income.”
BANK FACILITIES EXPIRING WITHIN THE
GOING CONCERN PERIOD
• 2% increase in SONIA interest rate from current levels
The following facilities were due to expire within the going
• Sales progression at Hudson Quarter, York is
concern period and thus are classified as current liabilities on the
significantly reduced
• Cash reserves are used to repay debt/cure bank facility
covenants in the event of covenant breaches
LIQUIDITY
At 31 March 2022 the Group had £28.1m of cash and cash
equivalents. The fair value of our property portfolio is £259.0m,
with £101.8m debt drawn at 31 March 2022 with net assets of
£177.2m. The Group increased its total annual dividend paid or
declared for the year by 26.2% to 13.25p, fully covered from rental
income. The Group has conservative gearing and reduced its
gearing from 42% to 28% during the year as a result of its disposal
strategy and strong Hudson Quarter residential apartment sales.
The outstanding development facility of £20.6m at the start of the
year was repaid in full, eight months ahead of schedule. There is
a clear sales strategy at Hudson Quarter, York for the remaining
residential apartments, and is expected to deliver significant cash
into the Group over the next 12 months.
RENT COLLECTION
Rent collection has been resilient throughout the pandemic, and
this has continued to be resilient as we return to normality. We
have collected 98% of all rents demanded for the year ending
31 March 2022. On a quarterly basis, we have increased the cash
collected compared to each prior period comparative quarter
through the year. The high collection rate has continued into
the new financial year with 98% collected for the March 2022
rent demands, which we expect to climb higher as the quarter
progresses.
During the financial year we have given £0.1m of rent concessions
to tenants who have struggled to satisfy their rents. This is down
from £1.1m in the prior year, underpinning the strength of our
tenant base. We also released £0.4m of ECL provision as a result
of collecting a high proportion of our rents.
A fundamental area of our business is to collect our rents, and
having gone through a global pandemic where the economy
effectively shut down, we are buoyed by our strong rent collection
statistics over the past two years and we are positive that we will
continue this high rent collection in the future.
37
Balance Sheet:
Santander facility
The Santander facility is cross collateralized across three assets
in Newcastle, Manchester and Northampton. The current loan
balance is £24.8m and the carrying value of the asset is £48.3m.
This loan was due to mature on 3 August 2022. On 27 May 2022,
the Group refinanced this loan facility in full for a further five
years, therefore this falls outside the going concern period and
the three year viability period. The margin on this new facility has
decreased from 2.5% to 2.2%, providing increased headroom on
the ICR covenants.
Lloyd’s facility
The Lloyds facility is secured by an office and retail asset at One
Derby Square in Liverpool. The current loan balance is £6.8m and
the carrying value of the asset is £13.2m. This loan was due to
mature on 7 March 2023. On 13 April 2022, the Group took the
option to extend the loan by one year, therefore maturing on 7
March 2024. This falls outside the going concern period but falls
within the three year viability assessment.
DEBT COVENANTS / STRESS TESTING
Our lenders have remained supportive as the economic climate
has improved as the economy learns to live with the pandemic.
We continually assess our rent receipts and outstanding arrears.
We engage with our lenders ahead of potential breaches in
covenants based on our continuous review of our covenant
headroom.
All covenants were compliant during the year or waivers obtained.
A waiver was obtained in April 2021 for the Scottish Widows
facility which came under pressure as rent concessions or deferrals
were still in the process of being agreed. Due to the high rent
collection during the year, there was considerable headroom on
all other banking covenants. This is expected to continue as we
collect a high proportion of rents.
STRATEGIC REPORTSTRATEGIC REPORT Risk
management C O N T I N U E D
The going concern assessment of debt covenants considered the
prospect of the downside scenarios stated above. The Directors
undertook reverse stress testing to confirm the resilience of the
covenants, including a 15% reduction in rental collection from our
two leisure assets, 75% of tenants vacating on break clauses and
75% vacating on lease expiry on all assets, as well as an increase in
the SONIA interest rate. Given the current inflationary pressures,
this has created uncertainty in interest rate increases. A 2%
increase in SONIA interest rates from current levels was modelled
as part of the downside assessment. The current SONIA rate is
just below 1% therefore a 3% SONIA interest rate was applied
throughout the whole period of the assessment. As the current
SONIA interest rate is just below 1%, the rate would need to
increase to roughly 5% in order to average 3% for the assessment
period. The downside was modelled to assess the impact on the
covenants, especially interest cover rations (ICR), debt service
cover ratios (DSC) and loan to value ratios (LTV). We considered
the credit rating and financial position of key tenants as part of
the exercise and the potential impact they could have on the
loan covenants. The downside scenario only placed pressure on
one loan facility. If in the unlikely event this would happen, the
Directors have the option to sell assets and repay part of the
proceeds to the debt facilities and mitigate this risk by increasing
GOING CONCERN STATEMENT
Based on the analysis undertaken of the reasonable downside
scenarios and the subsequent sensitivity analysis and stress
testing, the Group has sufficient liquidity to meet its ongoing
liabilities that fall due over the assessment period. Great
consideration has been given to the impact on our liquidity, loan
covenants and the mitigating actions available to the Group to
ensure that the Company has adequate resources to continue in
operational existence for a period of at least 12 months. Given
the market information available, the Directors are not aware of
any material uncertainty that exists that may cast doubt upon
the Group’s ability to continue as a going concern. As a result,
the Directors consider it appropriate to continue to prepare the
financial statements on a going concern basis.
VIABILITY STATEMENT
In accordance with the UK Corporate Governance Code and
taking into consideration the current economic uncertainty, the
Directors have assessed the prospects of the Group and future
viability over a three-year period from the year end, being longer
than the 12 months required by the “Going Concern” provision.
the headroom on ICR covenants.
The Board’s assessment of the Group’s viability for the next three
In addition, another downside scenario was considered using the
same assumptions as above, except for assuming the largest five
tenants within our portfolio only pay half of their rents over the
next 12 months. This would place even further pressure on the
covenants, however, this can be mitigated with a similar cure as
years has been made with reference to:
• The impact of the current economic uncertainties and resulting
impact on the Group and our tenants’ ability to operate and
meet their rental obligations.
• The key principal risks of the business and its risk appetite.
indicated in the previous assessment.
• The Group’s long-term strategy.
We have significant headroom on our LTV covenants tests,
meaning if values fell 20% we would only need £3.6m to cure any
breaches across the debt portfolio. During the year the Group
repaid £15.7m of bank debt, excluding the development facility in
which £20.6m was repaid. This has provided us further headroom
on our LTV covenants. The Scottish Widows facility of £9.0m,
which is the smallest loan facility within the Group, has the lowest
headroom of 8.1%, which means the value would need to fall by
£1.4m before a potential covenant breach. Should we breach any
covenants, our working capital model provides evidence that the
Group has sufficient capital to cure any breach without lender
support through covenant waivers. The Group can also access
additional capital through liquidating various assets which are
• The impact on business operations, mainly rent collection,
rising interest rates and progress on residential sales at
Hudson Quarter, in the event of a downturn in the economy.
• The Group’s current position and its ability to meet future
financial obligations to remain covenant compliant.
ASSESSMENT OF REVIEW PERIOD
The Board considers a period of three years to be appropriate
over which to assess the long-term viability of the Company for
the following reasons:
• The Group’s working capital model, detailed budgets and cash
flows consist of a rolling three-year forecast.
not secured to lenders though this remedy is not required in the
stress testing undertaken. In addition, the debt across the Group is
•
It reflects the short cycle nature of the Group’s developments
and asset management initiatives.
secured on a bilateral basis between SPV and bank, therefore the
• This is the period in which the investment team assesses
liability is contained within the SPV and the Group has alternative
individual asset performance.
options to generate liquidity to settle its debt obligations as they
• Office refurbishments completed to date have taken less than
fall due and therefore continue as a going concern.
12 months.
• The Group’s weighted average debt maturity at
31 March 2022 was 1.9 years – this has increased to 2.9 years
post year end following the refinancing of the Santander
facility and the extension of the Lloyds facility.
• The Group’s WAULT at 31 March 2022 was 4.7 years.
38
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 STRESS TESTS & DOWNSIDE
The Directors have undertaken a robust scenario assessment
of the principal risks which could threaten the viability or the
operational existence of the Group. As part of the downside
modelling, we reverse stress-tested our working capital model and
cash flows to understand the impact of our principal risks including
rising inflation and interest rates, the impact of the increased cost
of living on our tenants, the ability to meet our debt covenants,
execute our sales strategy at our completed development and
refinance our debt facilities.
The Group’s downside forecasts and projections took into
consideration a) reasonable potential reduction in rent collection
from tenants with increased number of tenants vacating at lease
break and expiry; b) a reduction in forecasted residential sales at
our completed development; c) increased SONIA rates; d) reverse
stress testing of the Group’s debt facilities and liquidity headroom;
and e) our ability to refinance our Lloyds, NatWest, and Barclays
facilities during the viability period.
positive discussions with the banks have already taken place.
In the event that one or more of the loan facilities could not be
refinanced, the Directors would dispose of the assets at a discount
and repay the bank debt which would release substantial capital
into the Group to help mitigate against other downside scenario
The debt covenants were reverse stress-tested beyond the
12-month going concern period to allow for changes to banking
impacts. As a result, the Company will continue to operate
in accordance with its existing bank covenants with a smaller
covenants over the three-year viability period based on the
property portfolio.
scenarios above. If there was an economic downturn, ICR, DSC
and LTV covenants could come under pressure. If covenant
waivers were not obtained for a covenant breach, we would utilise
CONFIRMATION OF VIABILITY
cure rights and use additional liquidity if available. The Directors
Having assessed the current position of the Group, its prospects
have considered further actions that could be taken to mitigate
and principal risks and taking into consideration the assumptions
any negative cash flow impact and ensure additional liquidity. The
stated above, the Board has a reasonable expectation that the
Directors have assumed the Barclays, NatWest and Lloyds facilities
Group will be able to continue in operation and meet its liabilities
due to mature within the viability period will be refinanced as
as they fall due over the next three years.
h
g
H
i
n
o
i
t
a
g
i
t
i
m
r
e
t
f
a
d
o
o
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i
l
e
k
i
L
i
m
u
d
e
M
w
o
L
Low
RISKS
SCORE
YEARLY
MOVEMENT
1 Market Cycle
2 Economic and
Political
3 Capital Structure
4 Liquidity
5 Portfolio
Strategy
6 Asset
Management
7 Valuation
8 Tenant Demand
9 Business
Continuity /
Cyber
10 People
11 Climate Change
12 Regulatory
and tax
12
12
10
8
10
6
11
7
4
12
10
6
➞➞
➞➞
➞
➞
➞
➞➞
➞
➞
➞
➞
NEW
➞➞
1
2
10
11
7
3
4
5
8
6
9
12
Medium
High
Potential impact after mitigation
39
STRATEGIC REPORTSTRATEGIC REPORT
04
LIQUIDITY
Risk description
PORTFOLIO RISKS
05
06
PORTFOLIO STRATEGY
ASSET MANAGEMENT
Risk description
Risk description
Increasing costs of borrowing and increasing
An inappropriate investment and development
Failure to implement asset business plans
interest rates could affect the Group's ability to
strategy that is not aligned to overall corporate
and elevated risks associated with major
borrow or reduce its ability to repay its debts.
purpose objectives, economic conditions, or
development or refurbishment could lead to
tenant demand may result in lower investment
longer void periods, higher arrears and overall
returns
investment performance, adversely impacting
returns and cashflows.
Risk
management C O N T I N U E D
STRATEGIC RISKS
01
02
FINANCIAL RISKS
03
MARKET CYCLE
Risk description
ECONOMIC AND POLITICAL
CAPITAL STRUCTURE
Risk description
Risk description
Failure to react appropriately to changing
market conditions and adapt our corporate
strategy could negatively impact shareholder
returns. Failure to close the NAV gap could
lead to increased shareholder activism and
make the Company a target for takeover.
Mitigation
The Board monitors market indicators and
reviews the Group’s strategy and business
objectives on a regular basis. It will tailor the
delivery of the Company’s strategy in light
of current and forecast market conditions.
Management continues to take action to
close the NAV gap including corporate and
property activities.
Uncertainty from Covid-19 and other world
events (including Brexit, rising inflation, rising
interest rates, cost of living crisis) could impact
economic growth, weakening demand for our
tenants and the profitability of their businesses.
An inappropriate level of gearing or failure
to comply with debt covenants or manage
re-financing events could put pressure on cash
resources and lead to a funding shortfall for
operational activities.
Decisions made by Government and local
councils can have a significant impact on our
ability to extract value from our properties.
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
Underlying Government support for the
regions and levelling up bodes well for the
markets in which we operate outside London.
Further, through the use of consultants and
experts we can anticipate key planning and
development policies and consider how
these may impact our activities. Management
continues to build on strong relationships
with key stakeholders such as our tenants
and banks, so in the event of an economic
downturn, we can ensure any adverse impact
is minimised.
The Board regularly reviews its capital risk
management policy, gearing strategy and
debt maturity profile. Gearing is maintained
at an appropriate level and hedging is utilised
to reduce exposure to interest rate volatility.
Management maintain close relationships
with key lenders. Assets are purchased
that generate surplus cash and significant
headroom on all loan covenants.
Undrawn bank facilities are in place to ensure
The Board regularly reviews the Group's
The process for reviewing asset business
sufficient funds are available to cover potential
investment strategy and asset allocation to
plans is embedded in the annual budget
liabilities arising against projected cashflows.
ensure this is aligned to the overall corporate
process. The Group’s Capital Risk Management
The Board reviews financial forecasts on a
strategy. Every proposed corporate or property
Policy limits development expenditure to
regular basis, including sensitivity against
acquisition requires Investment Committee
<25% of Gross Asset Value and the core
financial covenants. The Audit and Risk
approval, before final approval from the Board.
portfolio generates sustainable cash flows.
Committee considers the going concern status
Our regional model ensures no exposure to
Our experienced management team with
of the Group bi-annually.
London. Property returns are benchmarked
vast networks and use of advisors and
against the MSCI IPD index and performance
property managers supports the execution
against the benchmark is reviewed formally at
of asset management strategies. Our active
the half year end and year end.
management approach and new investment
modelling system ensures we can monitor and
analyse our cash flows, income streams and
monitor the impact of vacant space on returns.
Current position
The Board regularly reviews market indicators
and the Group’s strategy and business
objectives. It will tailor the delivery of the
Company’s strategy in light of current and
forecast market conditions. Management
continues to take action to close the NAV gap.
Current position
Current position
Current position
Current position
Current position
Our budgets reflect current trading conditions.
The markets in which we operate, including
government actions and economic activity are
regularly reviewed.
The Group’s weighted average debt maturity is
currently 1.9 years, rising to 2.9 years following
the refinancing post year end. The Group’s
LTV has decreased from 42% to 28% with a
downward trajectory. The Board's target LTV
is <40%.
The Barclays development facility has been
Rebalancing of the portfolio towards a core
Our development and refurbishment pipeline
repaid. The Santander facility has been
weighting with a focus on office and industrial
is continuously assessed to ensure the
refinanced after year end on a new five year
assets. No single asset comprises more than
right projects are being brought forward at
term at a reduced margin. There is a threat of
10% of the portfolio’s value.
appropriate times ensuring exposure at any
one time is limited.
rising interest rates and inflation. Inflation has
increased due to multiple global supply chain
factors, which in turn has led to the threat of
rising interest rates.
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
5
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
12
5
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
12
40
5
Impact after mitigation
Score 1 (low) - 10 (high)
5
Overall Risk Rating
Score 1 (low) - 20 (high)
10
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
4
6
10
4
4
8
3
3
6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 STRATEGIC RISKS
01
02
FINANCIAL RISKS
03
MARKET CYCLE
Risk description
ECONOMIC AND POLITICAL
CAPITAL STRUCTURE
Risk description
Risk description
Failure to react appropriately to changing
Uncertainty from Covid-19 and other world
An inappropriate level of gearing or failure
market conditions and adapt our corporate
events (including Brexit, rising inflation, rising
to comply with debt covenants or manage
strategy could negatively impact shareholder
interest rates, cost of living crisis) could impact
re-financing events could put pressure on cash
returns. Failure to close the NAV gap could
economic growth, weakening demand for our
resources and lead to a funding shortfall for
lead to increased shareholder activism and
tenants and the profitability of their businesses.
operational activities.
make the Company a target for takeover.
Decisions made by Government and local
councils can have a significant impact on our
ability to extract value from our properties.
Mitigation
The Board monitors market indicators and
reviews the Group’s strategy and business
objectives on a regular basis. It will tailor the
delivery of the Company’s strategy in light
of current and forecast market conditions.
Management continues to take action to
close the NAV gap including corporate and
property activities.
Underlying Government support for the
The Board regularly reviews its capital risk
regions and levelling up bodes well for the
management policy, gearing strategy and
markets in which we operate outside London.
debt maturity profile. Gearing is maintained
Further, through the use of consultants and
at an appropriate level and hedging is utilised
experts we can anticipate key planning and
to reduce exposure to interest rate volatility.
development policies and consider how
Management maintain close relationships
these may impact our activities. Management
with key lenders. Assets are purchased
continues to build on strong relationships
that generate surplus cash and significant
with key stakeholders such as our tenants
headroom on all loan covenants.
and banks, so in the event of an economic
downturn, we can ensure any adverse impact
is minimised.
Current position
The Board regularly reviews market indicators
and the Group’s strategy and business
objectives. It will tailor the delivery of the
Company’s strategy in light of current and
forecast market conditions. Management
continues to take action to close the NAV gap.
Our budgets reflect current trading conditions.
The Group’s weighted average debt maturity is
The markets in which we operate, including
currently 1.9 years, rising to 2.9 years following
government actions and economic activity are
the refinancing post year end. The Group’s
regularly reviewed.
LTV has decreased from 42% to 28% with a
downward trajectory. The Board's target LTV
is <40%.
04
LIQUIDITY
Risk description
Increasing costs of borrowing and increasing
interest rates could affect the Group's ability to
borrow or reduce its ability to repay its debts.
PORTFOLIO RISKS
05
06
PORTFOLIO STRATEGY
ASSET MANAGEMENT
Risk description
Risk description
An inappropriate investment and development
strategy that is not aligned to overall corporate
purpose objectives, economic conditions, or
tenant demand may result in lower investment
returns
Failure to implement asset business plans
and elevated risks associated with major
development or refurbishment could lead to
longer void periods, higher arrears and overall
investment performance, adversely impacting
returns and cashflows.
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
Undrawn bank facilities are in place to ensure
sufficient funds are available to cover potential
liabilities arising against projected cashflows.
The Board reviews financial forecasts on a
regular basis, including sensitivity against
financial covenants. The Audit and Risk
Committee considers the going concern status
of the Group bi-annually.
The Board regularly reviews the Group's
investment strategy and asset allocation to
ensure this is aligned to the overall corporate
strategy. Every proposed corporate or property
acquisition requires Investment Committee
approval, before final approval from the Board.
Our regional model ensures no exposure to
London. Property returns are benchmarked
against the MSCI IPD index and performance
against the benchmark is reviewed formally at
the half year end and year end.
The process for reviewing asset business
plans is embedded in the annual budget
process. The Group’s Capital Risk Management
Policy limits development expenditure to
<25% of Gross Asset Value and the core
portfolio generates sustainable cash flows.
Our experienced management team with
vast networks and use of advisors and
property managers supports the execution
of asset management strategies. Our active
management approach and new investment
modelling system ensures we can monitor and
analyse our cash flows, income streams and
monitor the impact of vacant space on returns.
Current position
Current position
Current position
Current position
Current position
The Barclays development facility has been
repaid. The Santander facility has been
refinanced after year end on a new five year
term at a reduced margin. There is a threat of
rising interest rates and inflation. Inflation has
increased due to multiple global supply chain
factors, which in turn has led to the threat of
rising interest rates.
Rebalancing of the portfolio towards a core
weighting with a focus on office and industrial
assets. No single asset comprises more than
10% of the portfolio’s value.
Our development and refurbishment pipeline
is continuously assessed to ensure the
right projects are being brought forward at
appropriate times ensuring exposure at any
one time is limited.
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
5
5
10
5
7
12
5
7
12
4
Impact after mitigation
Score 1 (low) - 10 (high)
4
Overall Risk Rating
Score 1 (low) - 20 (high)
8
3
Impact after mitigation
Score 1 (low) - 10 (high)
3
Overall Risk Rating
Score 1 (low) - 20 (high)
6
4
Impact after mitigation
Score 1 (low) - 10 (high)
6
Overall Risk Rating
Score 1 (low) - 20 (high)
10
41
STRATEGIC REPORTSTRATEGIC REPORT Risk
management C O N T I N U E D
PORTFOLIO RISKS
07
VALUATION
08
OPERATIONAL RISKS
09
TENANT DEMAND
AND DEFAULT
BUSINESS CONTINUITY
AND CYBER SECURITY
10
PEOPLE
ENVIRONMENTAL, SOCIAL AND GOVERNANCE RISKS
11
12
CLIMATE CHANGE
REGULATORY AND TAX
Risk description
Risk description
Risk description
Risk description
Risk description
Risk description
Decreasing capital and rental values could
impact the Group's portfolio valuation leading
to lower returns.
Failure to adapt to changing occupier
demands and/or poor tenant covenants may
result in us losing significant tenants, which
could materially impact income, capital values
and profit.
Business disruption as a result of physical
damage to buildings, Government policy and
social distancing measures implemented in
response to pandemics, cyber attacks or other
operational or IT failures or unforeseen events
may impact income and profits.
An inability to attract or retain staff and
Failure to anticipate and prepare for transition
Non-compliance with the legal and regulatory
Directors with the right skills and experience
and physical risks associated with climate
requirements of a public real estate company,
or failure to implement appropriate
succession plans may result in significant
underperformance or impact the overall
effectiveness of our operations.
change including increasing policy and
including the REIT regime could result in
compliance risks associated with existing and
convictions or fines and negatively impact
emerging environmental legislation could
reputation.
lead to increased costs and the Group’s
assets becoming obsolete or unable to
attract occupiers.
Mitigation
Independent valuations are undertaken for all
assets at the half year end and year end. These
are reviewed by management and the Board.
Members of the Audit and Risk Committee
meet with the valuers at least once a year to
discuss valuations and the valuation process.
Management actively review leases, tenant
covenants and asset management initiatives to
grow capital and rental values.
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
The Board regularly reviews the portfolio's
overall tenant profile and sector diversification.
Tenant diversification is high with no tenant
making up more than 10% of total rental
income. Management maintain close
relationships with tenants, understanding their
needs and supporting them throughout their
business cycle. Managing agents support
rent collection on a regular basis. Tenant due
diligence and credit checks are undertaken on
an ongoing basis to review covenant strength
of existing and prospective tenants. Our ESG
strategy focuses on our stakeholder needs and
ensuring sufficient Board oversight and time is
spent responding to tenant interests.
Our governance structure and internal control
systems ensure sufficient Board oversight,
with delegated responsibilities, segregation
of duties and clear authorisation processes.
A comprehensive programme of insurance is
in place which covers buildings, loss of rent,
cyber risks, Directors' and Officers liability and
public liability. Antivirus software and firewalls
protect IT systems and data is regularly
backed up.
We engage with staff regularly and encourage
The Group's ESG Committee oversees the
The Company employs experienced staff
a positive working environment. We maintain
execution of ESG related matters and ensures
and external advisers to provide guidance
an appropriate reward and benefits package
these are integrated into our business model
on key regulatory, accounting and tax issues.
and undertake regular performance reviews for
and corporate strategy. Climate related risks
Compliance with the REIT regime is regularly
each employee. The Workforce Advisory Panel
are considered as part of our overall corporate
monitored by the Board and the Executive
provides a forum that allows direct feedback
risk assessment and ongoing environmental
team will consider the impact on the regime as
to the Board on employee related matters.
management of our buildings. Major
part of their decision making.
Succession planning is a regular agenda item
refurbishment projects include environmental
for the Nominations Committee.
considerations to ensure buildings are
maintained to current standards.
Current position
Current position
Current position
Current position
Current position
Current position
Valuations are up on a like-for-like basis and
the market is showing signs of correction
following the pandemic impact. The ongoing
disposal programme has improved the overall
performance of the portfolio by removing
those that are low performers or where asset
management initiatives have been completed.
Loss of income from tenant administrations and
CVAs is less than 1% of portfolio contracted
income. Rent concessions have been honoured
and collection rates remain in excess of 98%
per quarter. The biennial Tenant survey was
reported to the board at the December 2021
meeting. Major refurbishments at Newcastle
and Northampton during the year have
incorporated ESG considerations.
Our business interruption processes were
well tested following the move to working
from home in response to the Covid-19
pandemic. The Board continues to review the
internal control environment and ensure good
governance practices are adopted throughout
the business. Cyber security arrangements
have been kept under regular review to
ensure we are deploying the most up to date
technologies.
A competitive employment market and
There has been an increased focus on
inflationary pressures are driving increased pay
environmental management and climate
Emerging corporate governance and audit
reforms may lead to considerable changes
and a review of benefits to ensure attraction
change is now considered to be a principal
to the financial reporting process, requiring
and retention of individuals with the skills,
risk. A TCFD working Group was established
additional processes and procedures to be
knowledge and experience required. The
during the year whose work will support the
put in place and additional reporting on the
Group's headcount is stable with sufficient
identification of climate-related risks and
Company's resilience. The Audit and Risk
cover if any key personnel are unavailable.
potential financial impacts. An initial warming
Committee and Board are monitoring these
The Workforce Advisory Panel continues to
scenario has already been analysed. Major
changes.
enhance employee engagement and ensure
refurbishments at Newcastle and Northampton
the Board understands the views of the whole
during the year have incorporated ESG
workforce. A flexible working model continues
considerations.
following the pandemic.
Likelihood after mitigation Score
1 (low) - 10 (high)
Likelihood after mitigation Score
1 (low) - 10 (high)
Likelihood after mitigation Score
1 (low) - 10 (high)
Likelihood after mitigation Score
Likelihood after mitigation Score
Likelihood after mitigation Score
1 (low) - 10 (high)
1 (low) - 10 (high)
1 (low) - 10 (high)
6
Impact after mitigation
Score 1 (low) - 10 (high)
5
Overall Risk Rating
Score 1 (low) - 20 (high)
11
2
Impact after mitigation
Score 1 (low) - 10 (high)
2
Overall Risk Rating
Score 1 (low) - 20 (high)
4
3
Impact after mitigation
Score 1 (low) - 10 (high)
4
Overall Risk Rating
Score 1 (low) - 20 (high)
7
42
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
5
7
12
5
5
10
4
2
6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 10
PEOPLE
ENVIRONMENTAL, SOCIAL AND GOVERNANCE RISKS
11
12
CLIMATE CHANGE
REGULATORY AND TAX
Risk description
Risk description
Risk description
Risk description
Risk description
Risk description
An inability to attract or retain staff and
Directors with the right skills and experience
or failure to implement appropriate
succession plans may result in significant
underperformance or impact the overall
effectiveness of our operations.
Failure to anticipate and prepare for transition
and physical risks associated with climate
change including increasing policy and
compliance risks associated with existing and
emerging environmental legislation could
lead to increased costs and the Group’s
assets becoming obsolete or unable to
attract occupiers.
Non-compliance with the legal and regulatory
requirements of a public real estate company,
including the REIT regime could result in
convictions or fines and negatively impact
reputation.
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
We engage with staff regularly and encourage
a positive working environment. We maintain
an appropriate reward and benefits package
and undertake regular performance reviews for
each employee. The Workforce Advisory Panel
provides a forum that allows direct feedback
to the Board on employee related matters.
Succession planning is a regular agenda item
for the Nominations Committee.
The Group's ESG Committee oversees the
execution of ESG related matters and ensures
these are integrated into our business model
and corporate strategy. Climate related risks
are considered as part of our overall corporate
risk assessment and ongoing environmental
management of our buildings. Major
refurbishment projects include environmental
considerations to ensure buildings are
maintained to current standards.
The Company employs experienced staff
and external advisers to provide guidance
on key regulatory, accounting and tax issues.
Compliance with the REIT regime is regularly
monitored by the Board and the Executive
team will consider the impact on the regime as
part of their decision making.
PORTFOLIO RISKS
07
VALUATION
08
OPERATIONAL RISKS
09
TENANT DEMAND
AND DEFAULT
BUSINESS CONTINUITY
AND CYBER SECURITY
Decreasing capital and rental values could
Failure to adapt to changing occupier
Business disruption as a result of physical
impact the Group's portfolio valuation leading
demands and/or poor tenant covenants may
damage to buildings, Government policy and
to lower returns.
result in us losing significant tenants, which
social distancing measures implemented in
could materially impact income, capital values
response to pandemics, cyber attacks or other
and profit.
operational or IT failures or unforeseen events
may impact income and profits.
Mitigation
Independent valuations are undertaken for all
assets at the half year end and year end. These
are reviewed by management and the Board.
Members of the Audit and Risk Committee
meet with the valuers at least once a year to
discuss valuations and the valuation process.
Management actively review leases, tenant
covenants and asset management initiatives to
grow capital and rental values.
The Board regularly reviews the portfolio's
Our governance structure and internal control
overall tenant profile and sector diversification.
systems ensure sufficient Board oversight,
Tenant diversification is high with no tenant
with delegated responsibilities, segregation
making up more than 10% of total rental
of duties and clear authorisation processes.
income. Management maintain close
A comprehensive programme of insurance is
relationships with tenants, understanding their
in place which covers buildings, loss of rent,
needs and supporting them throughout their
cyber risks, Directors' and Officers liability and
business cycle. Managing agents support
public liability. Antivirus software and firewalls
rent collection on a regular basis. Tenant due
protect IT systems and data is regularly
diligence and credit checks are undertaken on
backed up.
an ongoing basis to review covenant strength
of existing and prospective tenants. Our ESG
strategy focuses on our stakeholder needs and
ensuring sufficient Board oversight and time is
spent responding to tenant interests.
Current position
Current position
Current position
Current position
Current position
Current position
Valuations are up on a like-for-like basis and
Loss of income from tenant administrations and
Our business interruption processes were
the market is showing signs of correction
CVAs is less than 1% of portfolio contracted
well tested following the move to working
following the pandemic impact. The ongoing
income. Rent concessions have been honoured
from home in response to the Covid-19
disposal programme has improved the overall
and collection rates remain in excess of 98%
pandemic. The Board continues to review the
performance of the portfolio by removing
per quarter. The biennial Tenant survey was
internal control environment and ensure good
those that are low performers or where asset
reported to the board at the December 2021
governance practices are adopted throughout
management initiatives have been completed.
meeting. Major refurbishments at Newcastle
the business. Cyber security arrangements
and Northampton during the year have
have been kept under regular review to
incorporated ESG considerations.
ensure we are deploying the most up to date
technologies.
A competitive employment market and
inflationary pressures are driving increased pay
and a review of benefits to ensure attraction
and retention of individuals with the skills,
knowledge and experience required. The
Group's headcount is stable with sufficient
cover if any key personnel are unavailable.
The Workforce Advisory Panel continues to
enhance employee engagement and ensure
the Board understands the views of the whole
workforce. A flexible working model continues
following the pandemic.
There has been an increased focus on
environmental management and climate
change is now considered to be a principal
risk. A TCFD working Group was established
during the year whose work will support the
identification of climate-related risks and
potential financial impacts. An initial warming
scenario has already been analysed. Major
refurbishments at Newcastle and Northampton
during the year have incorporated ESG
considerations.
Emerging corporate governance and audit
reforms may lead to considerable changes
to the financial reporting process, requiring
additional processes and procedures to be
put in place and additional reporting on the
Company's resilience. The Audit and Risk
Committee and Board are monitoring these
changes.
Likelihood after mitigation Score
Likelihood after mitigation Score
Likelihood after mitigation Score
1 (low) - 10 (high)
1 (low) - 10 (high)
1 (low) - 10 (high)
Likelihood after mitigation Score
1 (low) - 10 (high)
Likelihood after mitigation Score
1 (low) - 10 (high)
Likelihood after mitigation Score
1 (low) - 10 (high)
6
5
11
3
4
7
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
2
2
4
5
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
12
4
Impact after mitigation
Score 1 (low) - 10 (high)
2
Overall Risk Rating
Score 1 (low) - 20 (high)
6
5
Impact after mitigation
Score 1 (low) - 10 (high)
5
Overall Risk Rating
Score 1 (low) - 20 (high)
10
43
STRATEGIC REPORTSTRATEGIC REPORT Section 172
statement
STAKEHOLDER
WHY WE ENGAGE
HOW WE ENGAGE AND OUR ACTIONS
KEY INTERESTS
HOW WE HAVE CONSIDERED STAKEHOLDERS
IN THE YEAR
Investors
Our investors rely on
us to allocate their
capital wisely, grow the
business and deliver
attractive returns.
Tenants
Employees
Suppliers, agents
and consultants
Our business is focused
on our tenants as
customers and we need
to understand how their
needs are changing and
ensure we continually
adapt to meet them.
Our employees are vital
to the Company, bringing
many years relevant
experience and are
encouraged to promote
the desired culture
and behaviours.
We rely on a number
of key partnerships to
support our property and
facilities management
and help deliver our
overall strategy.
Communities and
the environment
We must be mindful
of the impact our
operations have on
local communities and
the environment.
•
The Chairman has held regular meetings with key investors during the course of the year
Our investors are looking for robust financial performance that generates
The Board and Committees have taken the views of investors into account
• We have an established investor relations programme with bi-annual presentations
•
Shareholders, focused on retail investors, are able to attend the Company’s AGM where
they can question Directors and vote on matters put to the meeting
•
Regular trading updates and announcements to the market regarding performance
• Capital markets days coupled with opportunities to visit our properties
• Continuous monitoring of holdings with regular Shareholder analysis and review
• We increased our dividend in the year to Shareholders
a return on their investment incorporating both dividends and capital
regularly with the Chairman having met with over 60% of the register.
growth. Recent focus has been particularly on risk mitigation, governance
These have informed the strategy and strategic discussions including
and compliance. Investors are increasingly focused on ESG matters.
consideration of issues raised by investors at meetings, including for
example, methods for reducing the NAV gap between the share price and
net asset values of properties, and share buybacks.
Through our proactive approach to asset management, we engage with our tenants in a
variety of ways:
Our tenants want fit-for-purpose spaces that are able to evolve with their
We have considered the needs of our existing and future tenants during
businesses. They want the best built environment in which they can thrive
Board deliberations, for example in relation to capital expenditure on
• On-site review meetings
• Dedicated building managers and asset managers
•
•
•
•
•
•
Visiting assets and listening to concerns
Tenant surveys which cover general satisfaction, and opinions on how we can improve
our assets
Regular and frequent internal communications between staff and management
Our employees value an open and positive working environment. They
Employees regularly feature in Board discussions and were a key
Team strategy days, informing Board deliberations
Formal Workforce Advisory Panel
Social and sporting events to which all employees are invited
want to work for a Company that reflects and aligns with their values and to
consideration in relation to the risk management process and the elevation
receive a fair salary and benefits reflecting their contribution to the success
of people as a Principal Risk due to macroeconomic and industry related
of the Company.
pressures on the labour market and the need to retain and motivate
employees. Further information on decisions relating to workforce
remuneration is contained in the Remuneration Report.
at a fair price.
environmental improvements. The biannual tenant survey was discussed by
the Board to understand tenants' views on a variety of matters and these
helped deliberations on future asset management strategies and broader
ESG related matters.
We actively engage with our suppliers and work closely with them:
• Weekly meetings with our managing agents and regular contact by telephone and email
Our relationships with our suppliers are mutually beneficial supporting both
The use of the asset management model with a small internal team
parties’ interests. Our managing agents, property managers and external
overseeing the day to day activities and performance of our key agents
project managers want clear communication and operational efficiency.
is an important consideration of how the Company does business and
•
Formal review meetings
• Monthly meetings with our external project managers
•
•
Sharing insights and initiatives
Ensuring payments are made within agreed terms
We actively support community events and seek to have a positive impact on local areas:
• Creating employment opportunities
•
•
Enhancing the built environment
Supporting charitable organisations and local community activities
• Where large construction or refurbishment projects are underway, our contractors
will participate in schemes such as the Considerate Constructors Scheme and we will
consider certifications such as BREEAM to minimise the impact on our neighbours and
the environment
Lenders
Our debt providers
supply us with facilities to
draw down upon as and
when required for general
business purposes.
• We actively engage regularly through quarterly meetings with our banks
• We recently engaged with Santander and Lloyds extensively relating to our refinancing
of facilities that were due to expire in the next 12 months
• We consistently have met our covenant and repayment obligations with all our lenders
• We have a very positive long term relationship with our five key banks.
HOW STAKEHOLDER INTERESTS HAVE BEEN CONSIDERED WITHIN KEY STRATEGIC DECISIONS
Stakeholder considerations - employees and shareholders
At its annual strategy meeting in January 2022, the Board
The Board also considered the views expressed by the workforce
considered, in addition to the presentations from management,
at its own annual strategy meeting which preceded the Board
the feedback that the Chairman had received in his meetings
meeting. The opinions of the Company’s corporate brokers were
with shareholders representing c.40% of the register at that time.
also reflected upon.
44
is therefore a key issue for the Board. The Company uses consultants,
for example on ESG matters where external expertise is cost effective.
The Board utilises these and considers their information provided during
deliberations.
The communities within which we invest want to see attractive, safe and
As mentioned in the ESG section, communities and the environment are a
environmentally friendly spaces, which enhance the local area. They
key element of the values of the Company and the Board understands the
want to be kept up to date with planned activities and have a say on
need to foster these and other stakeholders over time especially in relation
what happens.
to future strategy.
Our lenders wish to see a return on the money lent to the Company and
We considered the requirement for refinancing of the loans that expired
the long term success of the Company, particularly over the term of any
in the year and gave due consideration to the strong relationship we have
loans provided.
built to secure favourable terms to the extension agreed post year end.
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 •
Regular trading updates and announcements to the market regarding performance
• Capital markets days coupled with opportunities to visit our properties
• Continuous monitoring of holdings with regular Shareholder analysis and review
• We increased our dividend in the year to Shareholders
Tenants
Our business is focused
Through our proactive approach to asset management, we engage with our tenants in a
on our tenants as
variety of ways:
customers and we need
to understand how their
needs are changing and
ensure we continually
adapt to meet them.
• On-site review meetings
• Dedicated building managers and asset managers
Visiting assets and listening to concerns
Tenant surveys which cover general satisfaction, and opinions on how we can improve
our assets
Employees
Regular and frequent internal communications between staff and management
Our employees are vital
to the Company, bringing
many years relevant
experience and are
encouraged to promote
the desired culture
and behaviours.
Team strategy days, informing Board deliberations
Formal Workforce Advisory Panel
Social and sporting events to which all employees are invited
facilities management
and help deliver our
overall strategy.
•
Formal review meetings
• Monthly meetings with our external project managers
Sharing insights and initiatives
Ensuring payments are made within agreed terms
Communities and
the environment
We must be mindful
of the impact our
operations have on
local communities and
the environment.
• Creating employment opportunities
Enhancing the built environment
We actively support community events and seek to have a positive impact on local areas:
Supporting charitable organisations and local community activities
• Where large construction or refurbishment projects are underway, our contractors
will participate in schemes such as the Considerate Constructors Scheme and we will
consider certifications such as BREEAM to minimise the impact on our neighbours and
the environment
Lenders
Our debt providers
• We actively engage regularly through quarterly meetings with our banks
supply us with facilities to
draw down upon as and
when required for general
business purposes.
• We recently engaged with Santander and Lloyds extensively relating to our refinancing
of facilities that were due to expire in the next 12 months
• We consistently have met our covenant and repayment obligations with all our lenders
• We have a very positive long term relationship with our five key banks.
•
•
•
•
•
•
•
•
•
•
STAKEHOLDER
WHY WE ENGAGE
HOW WE ENGAGE AND OUR ACTIONS
KEY INTERESTS
Investors
Our investors rely on
us to allocate their
capital wisely, grow the
business and deliver
attractive returns.
•
The Chairman has held regular meetings with key investors during the course of the year
• We have an established investor relations programme with bi-annual presentations
•
Shareholders, focused on retail investors, are able to attend the Company’s AGM where
they can question Directors and vote on matters put to the meeting
Our investors are looking for robust financial performance that generates
a return on their investment incorporating both dividends and capital
growth. Recent focus has been particularly on risk mitigation, governance
and compliance. Investors are increasingly focused on ESG matters.
HOW WE HAVE CONSIDERED STAKEHOLDERS
IN THE YEAR
The Board and Committees have taken the views of investors into account
regularly with the Chairman having met with over 60% of the register.
These have informed the strategy and strategic discussions including
consideration of issues raised by investors at meetings, including for
example, methods for reducing the NAV gap between the share price and
net asset values of properties, and share buybacks.
Our tenants want fit-for-purpose spaces that are able to evolve with their
businesses. They want the best built environment in which they can thrive
at a fair price.
We have considered the needs of our existing and future tenants during
Board deliberations, for example in relation to capital expenditure on
environmental improvements. The biannual tenant survey was discussed by
the Board to understand tenants' views on a variety of matters and these
helped deliberations on future asset management strategies and broader
ESG related matters.
Our employees value an open and positive working environment. They
want to work for a Company that reflects and aligns with their values and to
receive a fair salary and benefits reflecting their contribution to the success
of the Company.
Employees regularly feature in Board discussions and were a key
consideration in relation to the risk management process and the elevation
of people as a Principal Risk due to macroeconomic and industry related
pressures on the labour market and the need to retain and motivate
employees. Further information on decisions relating to workforce
remuneration is contained in the Remuneration Report.
Suppliers, agents
and consultants
We rely on a number
of key partnerships to
support our property and
We actively engage with our suppliers and work closely with them:
• Weekly meetings with our managing agents and regular contact by telephone and email
Our relationships with our suppliers are mutually beneficial supporting both
parties’ interests. Our managing agents, property managers and external
project managers want clear communication and operational efficiency.
The use of the asset management model with a small internal team
overseeing the day to day activities and performance of our key agents
is an important consideration of how the Company does business and
is therefore a key issue for the Board. The Company uses consultants,
for example on ESG matters where external expertise is cost effective.
The Board utilises these and considers their information provided during
deliberations.
The communities within which we invest want to see attractive, safe and
environmentally friendly spaces, which enhance the local area. They
want to be kept up to date with planned activities and have a say on
what happens.
As mentioned in the ESG section, communities and the environment are a
key element of the values of the Company and the Board understands the
need to foster these and other stakeholders over time especially in relation
to future strategy.
Our lenders wish to see a return on the money lent to the Company and
the long term success of the Company, particularly over the term of any
loans provided.
We considered the requirement for refinancing of the loans that expired
in the year and gave due consideration to the strong relationship we have
built to secure favourable terms to the extension agreed post year end.
Outcome and action
The results of these discussions and in particular the input of
the workforce advisory panel were the adoption of an updated
purpose and vision and further consideration of strategic plans
for the Company.
45
STRATEGIC REPORTSTRATEGIC REPORT ESG Introduction
Working Responsibly
Environmental, Social and
Governance
Over the past two years, the COVID-19
pandemic and the increasing urgency
over climate action have only
accelerated the need for companies
to ensure that environmental, social
and governance (ESG) matters are
embedded within their business and
decision-making, both in the short,
medium and long-term. No more is
this the case than in the UK real estate
sector which is currently responsible for
approximately 40% of the UK’s carbon
emissions whilst managing an ever-
changing operating environment which
includes aspects such as the adoption of
a hybrid approach to office working and
the continued growth of online retail.
“It is not enough to
mitigate, manage and
report on ESG risks. We
need to make our buildings
perform more efficiently.”
Richard Starr,
Executive Property Director
It is not enough to mitigate, manage and report on ESG risks.
From an environmental perspective, it is clear that we must go
beyond simply doing less harm if we are to hit the required
reductions in carbon emissions and achieve net zero. As well as
reducing the amount of energy consumed, we need to make
our buildings perform more efficiently, use materials with less
embodied carbon and embrace the principles of the circular
economy by ensuring materials can be reused. From a social
standpoint, we need to ensure that we are looking after our
people; are providing our tenants with spaces which are healthy,
safe and fit for purpose; and engaging with and supporting our
communities as appropriate.
It is also clear that real estate companies cannot do this in
isolation. It requires a collaborative approach and Palace Capital is
committed to engaging with its stakeholders to achieve this. Good
governance and engagement with stakeholders in the Company,
continues to be at the forefront of the Company’s activities as a
listed and regulated Real Estate Investment Trust.
46
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 In 2020, we developed a corporate ESG strategy to mitigate the
The Board has taken ownership of developing the strategy,
risks and explore the opportunities in terms of the impacts of our
reflecting on and updating the Company's purpose and vision to
business on the environment, our communities, our tenants and
include ‘sustainable’ at its core and to highlight that the Company
our people. The main pillars of our strategy remain the same:
exists for the benefit of all our stakeholders.
ENVIRONMENTAL
• Future-proofing the portfolio – by understanding better the
environmental performance of our assets, we are actively
seeking to reduce energy use and greenhouse gas emissions
and improve energy efficiency.
SOCIAL
• Fostering a culture of inclusivity and consideration of
stakeholders’ interests – by promoting collaboration and input
across all levels of the business and engaging more closely
with our stakeholders.
GOVERNANCE
• Being a responsible business – by ensuring ethical business
practices and sound risk management.
The ESG Committee has led, on behalf of the Board, in overseeing
the implementation of the strategy and further considering its
development as we look at the pathway to net zero, which we will
disclose in greater detail in 2023. You can read more about the
decisions and actions of the ESG Committee on pages 79 to 80.
In last year’s report, we committed to:
• evolve our risk assessment processes to ensure the material
climate-related risks have been identified and understood;
• define our climate aims and ensure climate resilience is
appropriately integrated into the Company’s strategy;
•
identify appropriate metrics and targets to measure climate
related risks and opportunities in line with the Company’s
strategy and risk management processes.
You can read more about how climate considerations have been
integrated into our risk management framework on page 43,
while you can learn more about our approach to climate resilience
and associated targets in the section overleaf and within the ESG
Committee Report.
47
STRATEGIC REPORTSTRATEGIC REPORT Working Responsibly
Our ESG Strategy
STRATEGIC PILLAR
OBJECTIVES
FUTURE FOCUS
portfolio
l Future-proofing the
a
t
n
e
m
n
o
r
i
v
n
E
• To ensure that operational environmental
• Setting emissions reduction targets;
considerations and longer term climate change
risks and opportunities are embedded within
Palace Capital’s decision-making process
• To ensure that the Group’s real estate portfolio
is compliant, fit for purpose - now and in the
future – and is valued appropriately
improving EPC performance
• Planning for net zero
• Minimising waste disposal and water
consumption
• Creation of a Group biodiversity strategy
a
l Fostering a culture
i
c
of inclusivity and
o
S
considerations
of stakeholders’
interests
• To ensure that our employees are listened to,
• Dedicated engagement & action programme
looked after, trained and opportunities exist for
them to further their career l
• To ensure that the Group’s culture takes
account of equality, diversity and inclusion
• To ensure that we partner with our stakeholders
– in particular our tenants - to maintain healthy,
safe and energy efficient properties
with our tenants
• Utilising our team meetings and formal
workforce advisory panel feedback
e
c
n
a
n
r
e
v
o
G
Being a responsible
business
• To be recognised as a well-managed, ethical
business which has ESG integrated into its
business model
• Roll-out of a new purpose and values
to support our commitment towards
sustainability
• To have the right policies and committee
• Continue to integrate ESG into our risk
structures in place to ensure that sustainability
risks and opportunities are given due
consideration
• To communicate and report transparently with
all our stakeholders
management process
• Continue to improve our sustainability
reporting (2022: EPRA and CDP reporting)
ESG RISKS AND OPPORTUNITIES
The ESG Committee has considered various risks relating to ESG
matters including:
• Climate Change and Energy Use – greenhouse gas emissions
• Employee practices and relations
• Risk management and business continuity
• Tenant Satisfaction and collaboration
• Ethical business practices
• Biodiversity
• Sustainable supply chain
“This year, we have made
progress in assessing,
understanding and
managing the environmental
performance of our portfolio.”
Paula Dillon,
Chair of ESG Committee
48
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022
Our ESG
Environmental
As a responsible landlord, we have a duty to consider the impact
our assets have on the environment. During the year we have
made positive progress in assessing, understanding and managing
the environmental performance of our portfolio. We have focused
on data collection so that we understand our existing usage under
scope 1,2, and 3 and the ways in which we can work with tenants
to improve our overall environmental impact. We are now gaining
a better understanding and visibility of our carbon footprint.
Key to this is our EPC ratings and our desire to ensure that we bring the
portfolio up to a higher standard through active asset management.
We now have no G or H EPC rated buildings and are looking at moving
GHG emissions
Emissions type (tonnes of CO2
equivalents)
Scope 1
Scope 2
Total
towards at least a C or B rating across our portfolio by 2024.
Scope 3
GREENHOUSE GAS EMISSIONS
Our GHG calculation and reporting process follows the
Greenhouse Gas Protocol (“operational approach”) and the
Average GHG Intensity
(tCO2e/sqft2)
Scope 1 and 2 combined
2022
2021
742
14
752
16
7671
27
873
–
0.0008
0.0012
DEFRA Environmental Reporting Guidelines (2013). The boundary
Total energy use (kWh)
for reporting includes emissions from sources under our control,
Scopes 1 and 2
9,829,473
9,558,632
grouped under: Scope 1 (direct) GHG emissions from owned
assets; and Scope 2 (indirect) GHG emissions from landlord-
controlled electricity supplies.
The Company does not own any vehicles and emissions from
sources such as production processes and combustion sources
are minimal, therefore not deemed material. As a result, these
1 2021 GHG figures restated to take into account historical re-verification
of Scope 1 emissions at one property
OUR JOURNEY WITH TCFD:
October 2020
emissions are not included in reported totals. In addition, during
the year the Company introduced a new electric vehicle plan for
The first stage of our TCFD journey was to ensure the Board
understood its disclosure responsibilities and that an appropriate
employees which has been popular.
amount of resource was allocated to assessing climate related risks
We have a limited amount of energy use within our control. To
have a meaningful impact on greenhouse gas emissions we must
ensure we engage with our tenants and encouraging them to
consider their own energy consumption. This continues to be
a priority and the Company is starting to collect and report its
broader Scope 3 emissions for the first time as it looks to gain
greater visibility of its total carbon footprint. We will continue
to collaborate with our tenants and managing agents to be in a
position to report more fully on Scope 3 in next year's report.
and opportunities.
February 2021
The Board’s ESG Committee carefully considered the required
TCFD disclosures and reviewed the existing governance
framework to ensure the appropriate amount of board and
management attention is given to climate related issues.
It identified the appropriate people within the business to assess
the relevant risks and opportunities and agreed that an external
consultant should be engaged to provide ongoing support in
We have again disclosed our CO2 emissions. Total Scope 1 and 2
this area.
emissions have increased during the year as the UK came out of
lockdown and people returned to their workplaces. We will work
with our tenants on the strategy for overall carbon reduction as
March 2021
In March 2021 the Company engaged SIFA strategy to support the
by working together we can make a significant positive impact on
implementation of its wider ESG strategy, including the development
reducing energy usage.
of a climate resilience strategy.
2021/2022
We have worked to ensure climate resilience is appropriately
integrated into the company's strategy. We evolved our risks
assessment processes to ensure the material climate-related risks
have been identified and are developing the appropriate metrics
and targets to measure climate-related risks and opportunities
in line with the company's strategy as well as risk management
processes. We have worked on TCFD requirements and their
implementation.
Future
We will look at our pathway to net zero and what we need to do to
achieve this and in what time frame.
49
STRATEGIC REPORTSTRATEGIC REPORT TCFD
Being a responsible business
OVERVIEW
INITIAL CLIMATE CHANGE SCENARIO
Through the 2015 Paris Agreement, world governments have
As a first scenario, we considered a 2-degrees warming scenario,
committed to curbing the global temperature rise to well below
referencing the models mapped out by the Bank of England
2°C above pre-industrial levels and are pursuing efforts to limit
and the IMF’s World Economic Outlook. As well as considering
warming to 1.5°C. In 2018, the Intergovernmental Panel on
acute and chronic physical risks, the scenario included a series of
Climate Change warned that global warming must not exceed
transition risks and opportunities, such as changes in regulation
1.5°C to avoid the serious impacts of climate change and this
and policy. The principal real estate sectors discussed relevant to
ambition was reinforced at COP26, the United Nations Climate
Palace Capital were Retail & Leisure, Office and Industrial.
Change Conference held in November 2021. To achieve this,
greenhouse gas (GHG) emissions must halve by 2030 – and drop
to net-zero by 2050. As well as setting a further interim target of
reducing emissions by 78% by 2035, the UK Government has also
enshrined Net Zero in UK Law providing it with further options to
effect change and maintain momentum.
As regards to climate change, we have considered the risks and
potential financial implications to Palace Capital’s portfolio by
assessing a 2 degrees warming scenario, as part of the Taskforce
for Climate-related Financial Disclosures (TCFD) framework.
Our TCFD disclosures are included in the Annual Report. Palace
Capital’s asset management team has also been focusing on
The Financial Stability Board created the Task Force on Climate-
improving the EPC profile of the portfolio in order to reduce
related Financial Disclosures (TCFD) to improve and increase
exposure to current and future legislative and policy decisions
disclosure and reporting of climate-related financial information.
taken to address climate change risks. In the second half of 2022,
This is our first TCFD disclosure and we will continue to evolve our
we will be considering our net zero plans in detail and will be
approach and reporting in future years.
disclosing them in our 2023 Annual Report.
PALACE CAPITAL’S CONSIDERATION OF
THE TCFD FRAMEWORK
A TCFD working group comprising senior members from
asset management and finance and the leadership team have
met regularly throughout the year to appraise the potential
consequences of global climate change; discuss the TCFD
methodology and associated governance; work through a
recommended scenario; and consider the associated risk and
finance implications. Palace Capital’s ESG Board Committee
has also discussed the TCFD framework and been kept
regularly informed. The ESG Committee’s commitment to
the TCFD recommendations are referenced in the ESG Board
Committee’s Report.
In this section, we have provided an overview of our progress
and priorities against the requirements of Listing Rules 9.8.6R.
The Company has assessed its progress with the TCFD
Recommendations and Recommended Disclosures and the table
on the following page sets out our analysis.
GOVERNANCE
Palace Capital is committed to managing its environmental
impacts in a responsible way. The Board assumes overall
responsibility and accountability for the management of climate-
related risks and opportunities.
50
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 The remit of the ESG Board Committee is to oversee the Company’s
response to the evolving environmental, health and safety,
corporate social responsibility, corporate governance, sustainability,
and other public policy matters relevant to the Company. Its primary
responsibility is to oversee the formulation and discharge of the
Group’s corporate and social responsibilities and ensure its social,
environmental and economic activities are aligned.
M O R E I N F O R M AT I O N A B O U T T H E E S G C O M M I T T E E ’ S
OV E R S I G H T C A N B E F O U N D O N PAG E 7 9.
STRATEGY
Palace Capital invests in properties across the UK. These
properties contribute to carbon emissions through the energy
used to heat and power the buildings, and the embodied energy
used in construction and retrofit materials. Palace Capital’s
strategy is concentrated on helping its tenants reduce their carbon
emissions, though targeted investments, building upgrades, and
energy efficiency improvements. The carbon impacts from its own
administrative operations are limited. However, the business does
recognize that the energy consumed in its value chain impact
on GHG emissions indirectly, so it is focused on measuring and
RISK MANAGEMENT
managing these effectively.
The ESG Board Committee supports the Audit & Risk Committee
Physical climate risks are those which arise from both gradual
changes in climatic conditions and extreme weather events that
can result in asset damage, resource depletion, and disruption.
Transition risks occur in the process of moving to a low-carbon
economy. These include government policy changes, reputational
which oversees the Group’s risk management framework,
evaluating its principal and emerging risks, setting the risk
appetite, and assisting the Executive Management team with
developing and implementing the operational plans required to
strategically manage those risks.
impacts, as well as shifts in market preferences, norms,
The Audit and Risk Committee makes recommendations to the
and technology.
Major physical impacts to properties from climate change could
lead to disruption from flooding and storm damage as well as
Board on the principal risks of relevance to the business. Climate-
related issues are initially considered by the ESG Committee in
terms of potential for contribution to these principal risks.
communications and transport infrastructure. The company has
The issues considered include both the risk of physical
been analysing potential risks, based on geographic location, and
disruption to the business from climate change and the risks and
specific building type. Based on the location of its assets and the
opportunities as the UK economy transitions to significantly lower
specific office, retail, and industrial property types, the current
carbon emissions.
risk of prolonged physical disruption is regarded as very low, with
insurance cover in place to deal with any short-term impacts.
The transition of the UK economy to reduce carbon emissions
and evolving regulatory requirements at a national level is an
important consideration for the Company. Addressing climate
risks also provide opportunities for enhanced investment returns
in the medium to long term. Palace Capital is implementing a
targeted upgrade and retrofit programme, to meet more stringent
building performance and carbon emissions requirements: for
example, to meet existing Government minimum energy efficiency
regulations (MEES), and in anticipation of a further ratcheting up of
regulatory requirements for energy performance certificate (EPC)
ratings by 2030. Palace Capital has risk assessed its portfolio based
on building energy intensity, location, tenant composition, the
potential direct and indirect impacts on revenue and operating and
capital costs.
METRICS AND TARGETS
Palace Capital started measuring its greenhouse gas emissions
(GHG) in 2020. These GHG emissions cover Scope 1 direct
emissions from the usage of fuel in its operation and indirect Scope
2 emissions from electricity consumption on site. In this report,
we are starting to collect and report Scope 3 emissions for the
first time, including aspects such as purchased goods & services
(water); fuel & energy related activities; business travel; employee
commuting; teleworking; and upstream leased assets.
We intend to expand our measurement and reporting on
environmental sustainability in support of continual improvement.
51
STRATEGIC REPORTSTRATEGIC REPORT TCFD
Being a responsible business C O N T I N U E D
TCFD’S RECOMMENDED DISCLOSURES
DISCLOSURE
COMMENTARY
Describe the Board’s oversight of
climate-related risks and opportunities
Palace Capital established a Corporate Social Responsibility Committee in 2019 which
was reconstituted as the ESG Committee in 2020, in recognition of the increasing
importance of ESG to us, its stakeholders and broader society.
The Board, supported by input from the ESG Committee, assumes overall responsibility
and accountability for the management of climate-related risks and opportunities.
A TCFD Working Committee was established in 2021 and its progress and findings have
been reported into the ESG Committee.
Management has undertaken a review of the company’s Enterprise Risk Management
approach and climate-related issues have been integrated into the core risk management
process as a principal risk.
The short- and medium-term risks identified include increased utility costs;
unattractiveness of buildings to potential occupiers due to poor carbon performance;
and increased regulatory and policy measures.
The opportunities identified include: greater collaboration with tenants to improve
environmental performance; improved commercial opportunities of owning assets which
are energy efficient; and the possibility of securing more competitive financing.
Climate-related risks have been integrated within the company’s Principal Risks.
Climate and energy performance have been fully integrated into both investment and
asset management decision-making process.
The average life-cycle of Palace Capital’s assets is short to medium term and the assets
are exclusively located across the UK in well-connected regional transport hubs.
The company is continually reviewing its exposure to climate-related risks. Under a 2°C
scenario, the company’s strategy is considered resilient, bearing in mind the physical
locations of its assets and the actions it is taking to manage transition risks.
Palace Capital has formed a TCFD working committee to identify and assess and
manage climate related risks which reports through to the ESG Committee. This, in turn,
reports to the Board. The TCFD working committee will continue to meet and will be
leading on the Company’s thinking and planning re its net zero strategy.
Palace Capital considers and assesses climate-related risks and opportunities through the
ESG Committee and the Board.
GHG emissions and energy consumption, are disclosed in the Annual Report including
Scope 1 & 2 and are aligned to the Greenhouse Gas Protocol Corporate Standard and
DEFRA Environmental Reporting Guidelines.
We are starting to report Scope 3 emissions for the first time in this year’s Annual Report.
GHG emissions are disclosed in the Annual Report including Scope 1 & 2 and are
aligned to the Greenhouse Gas Protocol Corporate Standard.
We are starting to report Scope 3 emissions for the first time in this year’s Annual Report
recognising that further work is required going forwards. The related potential risks can
be viewed in the Risk Management section on page 36.
We have started to collect Scope 3 emissions for the first time and are now beginning to
gain greater visibility of our direct and indirect carbon footprint. We will be in a better
position to consider metrics including incremental improvements and net zero targets.
Describe the management’s role in
assessing and managing climate
-related risks and opportunities
Describe the climate-related risks
and opportunities the organisation
has identified over the short, medium,
and long term
Describe the impact of climate-
related risks and opportunities the
organisation’s businesses, strategy
and financial planning
Describe the resilience of the
organisation’s strategy, taking into
consideration different climate-related
scenarios, including a 2C or lower
scenario
Describe the organisation’s processes
for identifying and assessing and
managing climate-related risks
Describe the organisation’s processes
for managing climate-related risks
Disclose the metrics used by the
organisation to assess climate-related
risks and opportunities in line with its
strategy and risk management processes
Describe Scope 1, Scope 2 and if
appropriate, Scope 3 greenhouse gas
(GHG) emissions, and the related risks
Describe the targets used by the
organisation to manage climate-related
risks and opportunities and performance
against targets
52
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 53
STRATEGIC REPORTSTRATEGIC REPORT 5%
reduction in Scope 1 and 2
GHG emissions
99%
landlord controlled electricity from
renewable sources
22%
reduction in absolute landlord
purchased water consumption
14%
reduction in average building water
intensity
89%
Properties in the portfolio with an
EPC rating of A-D
ESG
Improving the environmental
performance of our assets
During the year, we have made good progress in embedding
environmental considerations in all aspects of asset management
and across our wider business model. This is reflected in an
improved EPC profile across the portfolio. Our Scope 1 and 2
emissions have decreased year on year reflecting the ongoing
improvements made to properties within our portfolio.
We have:
•
Incorporated energy efficiency measures into our major
building refurbishments
• Progressed our EPC management programme
•
Introduced guidance for our asset managers to ensure
ESG considerations are incorporated in our asset level
business plans
FUTURE PROOFING THE PORTFOLIO
Through effective asset management, we are seeking to reduce
our energy and resource consumption to minimise the impact
our assets have on the natural environment. We recognize that in
order to meet our tenants’ needs and be a responsible landlord,
our strategy must address the accelerating industry and global
challenges in the built environment. Not only will this future-proof
our business and ensure we are resilient, but it will also bring
greater consistency and efficiency.
Our active asset management approach means we are constantly
assessing the portfolio, earmarking assets for refurbishment
and renewal, utilising the latest technology and environmentally
efficient products so that our properties are equipped to meet
minimum energy efficiency standards. We continue to review
the EPC risk associated with existing assets and new purchases,
implementing improvement plans for any asset with an “E” rating
or below.
During the year we:
• Ensured our asset level business plans incorporate ESG
considerations and where material risks are identified a
strategy to manage and reduce these is put in place.
• Documented an environmental brief for our teams to work to
on major refurbishment and redevelopment projects.
• Evolved our data collection processes to ensure we have a
more comprehensive understanding of our carbon footprint
and the associated performance of our assets.
Over the next year we will continue to put in place further internal
processes to ensure environmental considerations are factored
into our portfolio management initiatives.
We will keep our ESG strategy under continuous review and
intend to participate in EPRA sustainability benchmark in 2022.
54
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 ESG
Case studies
Boulton House, Manchester
Our eight-storey office block in the heart of Manchester city
centre has benefited from significant refurbishment in recent
years. This included the installation of two new boilers and an
upgraded lobby area, which now benefits from LED lighting and
improved insulation.
The asset operates a zero waste to landfill policy and 100% of the
electricity procured is renewable.
St James’ Gate, Newcastle
Our multi-let office block in Newcastle city
centre is a prime example of how we are
focusing our efforts on future proofing our
buildings by improving their sustainability
performance.
As part of the energy efficient
refurbishment of the office areas, we
installed LED lighting on levels 3 and 7
with works underway to introduce a new
energy efficient HVAC system. We also
upgraded the toilet and shower facilities
and enhanced the external courtyard
for our 330 building occupants and the
wider estate.
Working with our tenants, we have
improved the EPC and the facilities and
received positive feedback from tenants.
F U RT H E R I N F O R M AT I O N O N ST JA M ES ' G AT E
I S O N PAG ES 5 6 TO 5 7.
55
STRATEGIC REPORTSTRATEGIC REPORT ESG
Future-proofing the portfolio
CURRENT EPC/MEES REQUIREMENTS
& COMPLIANCE
Since 1 April 2020, landlords can no longer let or continue to
let properties covered by the MEES Regulations if they have an
EPC rating below ‘E’. From 1 April 2023, this will be extended
to include existing leases, making it unlawful for a landlord to
continue to let commercial property rated F or less.
In the 2021 Annual Report, a stated priority was to remove the
7.45% of ‘F’ & ‘G’ certifications.
Through proactive review and asset disposals, all G certifications
have been removed from the portfolio and 'F' certifications
reduced to 0.7% (one asset with Listed Building Consent). During
2021/22, twenty five EPC’s were improved and the number of
EPC’s rated A-D increased from 75.7% to 88.8%.
FUTURE PROOFING – MOVING FROM
COMPLIANT TO EFFICIENT
The government has released a consultation on raising the
minimum energy efficiency standards in tenanted non-domestic
properties. It is proposed landlords will have until 2027 to get
properties up to a ‘C’ standard and a further 3 years to achieve
EPC B, where cost effective. In office and industrial markets,
corporate occupiers have strict EPC minimum requirements
when acquiring sites. In response, we have instigated the
below measures:
• KPI – A MEES/EPC rating has been included as a
Key Performance Indicator for 2022.
• Asset Business Plans – EPC considerations are now integral
to individual asset strategies including potential hold /
disposal decisions.
• CAPEX – Forecast EPC improvement expenditure is to be
put in place for all assets where required to meet minimum
future standards. E.g. LED Lighting / car charging points
across the portfolio.
• Data – Specialist consultants provide 3D modelling and advice
on HVAC, structure and glazing to inform EPC strategies.
This allows for confident budgeting and execution of EPC
improvement works.
• Acquisition Strategy – Potential acquisitions require a ‘B’
EPC rating or the ability to meet future minimum standards
through planned capital expenditure. We challenge the
validity of a potential acquisitions EPC rating through our
specialist consultants.
• Tenants – We engage with occupiers on improvements and
ensure that lease contracts protect our position on EPC ratings
over the lease term.
Our current EPC split is:
EPC CERTIFICATION
%
A
B
C
D
E
F
G
1.4%
15.4%
38.4%
33.6%
10.5%
0.7%
0.0%
56
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 St James’ Gate, Newcastle
Energy performance and sustainability is at the forefront of all our decision making, especially on CAPEX projects.
At St James’s Gate in Newcastle, we secured planning for change of use and converted two retail units into two self
contained office spaces within a striking courtyard plaza incorporating seating and planting and a greatly enhanced
tenant and visitor experience.
The refurbishment transformed two vacant spaces that were detracting from the development and the city, into much-
needed cutting edge offices for small and medium sized businesses.
Sustainability has been at the forefront of this refurbishment programme. The buildings will be minimum energy
efficiency standard (EPC) compliant i.e. B rating in 2030 thanks to several ESG measures.
New glazing and LED lighting has been installed to provide better natural and diffused light. New showers and WC
facilities, along with a new VRF system provide improved cooling and heating provision delivering the very best user
experience.
The contractor, Overbury, has a ‘zero waste to landfill’ policy and their supply chain of local sub-contractors and suppliers also
have strong ESG credentials.
Overbury diverted waste from landfill by minimising waste in the first instance; finding alternative uses for it; and
by maximising what can be reused and recycled. They aim to recycle at least 94% of waste on all projects and beat
that target on the St James’s Gate development project by achieving a 97% recycling rate. This was done through
vigorous segregation and waste management including the use of manufacturer take-back schemes.
57
STRATEGIC REPORTSTRATEGIC REPORT ESG
Social
Our workforce, the culture and our values are critical
to our Company's success.
Our portfolio of offices is well located
across regional towns and cities, so we
are well placed to support the ongoing
hybrid model with people’s preference
for a shorter commute and the increase in
work/life balance. This itself brings wider
environmental benefits with the shorter car
journeys as our buildings are often close to
major transport links.
EMPLOYEE ENGAGEMENT
– WORKFORCE ADVISORY
PANEL
In addition to our weekly team meetings,
all employees again participated in the
annual strategy session in January 2022,
This fed directly into the Board’s annual
strategy meeting.
The Workforce Advisory Panel continues
to meet quarterly to discuss matters
from across the business. A number of
business process improvements have been
implemented as a result of these sessions
and the panel has played an important role
in the development of our ESG strategy.
Feedback from the panel is provided
directly to the Board of Directors.
“The Workforce Advisory Panel is a
great way of getting across our points
to management and the Board so that
workforce considerations are front
and centre of their deliberations.”
Chris Petrie
Chair, Workforce Advisory Panel
OUR PEOPLE
Ensuring our people felt safe and
supported during the pandemic has
continued to be a key priority. We are a
small team and the culture of support and
care has been vital for returning to the
office to collaborate and connect. This
Matthew Simpson as CFO following his
previous role as Finance Director and
before that as Financial Controller. We
were also delighted that members of
staff completed further qualifications in
finance and members of the property team
furthered their development.
TRAINING AND
DEVELOPMENT
A thorough annual appraisal process
is conducted. We regularly invest in
employees’ development, encouraging
them to reach their full potential by
providing training opportunities.
has in turn helped inform our discussions
We are proud to be able to say that we did
when considering the views, concerns
and challenges of our tenants and the
not furlough any employees throughout
the pandemic, nor take up any other
new ways of working that have emerged,
Government support measures.
particularly from our office tenants. This
engagement has supported the success of
our rental recovery which was 98% across
the portfolio and 98% across our offices.
We remain committed to attracting and
retaining people of the highest calibre.
As part of our efforts to retain and attract
We recognise that employees prefer to
work from home on occasion so we have
adopted a hybrid model whereby we work
in the office collaboratively but people are
not expected to be in the office five days
a week. We appreciate that employees
now expect flexibility and does not affect
talent, we were delighted to appoint
their productivity.
58
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 CULTURE AND DIVERSITY
We ensure the values and behaviours within the business underpin a culture that is
aligned to the Group’s strategy and that policies and training are in place to support this.
The employees are at the heart of delivering our strategy so we empower them to take
responsibility for their contribution to the business. Our core values set out how we work
and the principles we expect everyone in our business to follow. These values create the
framework for building on our positive culture of inclusivity and working together.
MALE
FEMALE
Gender split across the
whole workforce
2
DIVERSITY POLICY
We continue to promote inclusivity and will ensure that no person is discriminated against
on grounds of religion, race, gender, pregnancy, marital status, age, sexual orientation,
or any other attribute which does not speak to a person’s ability to perform. We believe
that a diverse workforce is key to maximising business effectiveness and with this in mind
we aim to select, recruit, develop and promote the very best people. Whilst diversity is
much wider than gender balance, this area continues to be a key area of focus within our
small team.
VALUES
Active, Astute, Ambitious
Underpinning these values is our profound family ethos which permeates through our
employment policies, our approach to health and well-being and the manner in which we
support our employees.
10
Gender split across
senior management
6
Gender split on the Board
2
5
F O R F U RT H E R I N F O R M AT I O N O N T H E
B O A R D ’ S A PP R O AC H TO D I V E R S I T Y,
P L E A S E R E F E R TO PAG E 7 6 I N T H E
N O M I N AT I O N S C O M M I T T E E R E P O RT.
59
STRATEGIC REPORTSTRATEGIC REPORT ESG
Social C O N T I N U E D
Charities and local communities
St Georges Crypt, Leeds
This year we made a significant donation to St Georges Crypt
in Leeds, a charity which works with vulnerable and homeless
people, helping them to build confidence and self-esteem. This
charity provides structure to their lives so that they can maintain a
tenancy and avoid being homeless in the future through a tailored
programme of work-groups, volunteering opportunities, and life
skills training in a residential setting. We repeated our donation to
SASH, a youth homelessness charity that works across North and
East Yorkshire where our flagship development, Hudson Quarter,
York is located.
As a property investor, we believe it is fitting for us to support
groups for whom accommodation is a challenge and no one
was more seriously affected by this than those fleeing the war in
Ukraine, which was why the Company also donated to the Disaster
Emergency Committee’s Ukraine appeal which supplies essential
food, hygiene supplies and blankets for displaced families.
Closer to home, one employee joined a team walking 40 miles
over the course of a day to raise funds for cystic fibrosis. We also
pledged a donation to our surveyor’s daughter when she shaved
her head for The Little Princess Trust so that children affected
by cancer who had lost their hair due to chemotherapy could
enjoy long hair again by wearing a wig made from the donated
hair. Further donations, to The Bedfordshire NHS Trust and
the Sea Cadets, were other small expressions of empathy and
encouragement for other members of our community.
We were particularly pleased to be able to respond to an
appeal from the magician who performed a (virtual) show for our
Christmas party during lockdown. He was supporting ‘Spread a
Smile’, a charity which brings joy and laughter to thousands of
seriously ill and hospitalised children and their families during long
hospital stays through visits, outings, events and art initiatives.
60
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Hudson Quarter, York
In March 2022, the public had the opportunity to travel through
York and discover more than 40 ice sculptures designed
and sponsored by local businesses in York, including the
Company. These transported visitors into other destinations
‘Around the World’
H T T P S : // W W W.V I S I T YO R K . O RG / YO R K- I C E -T R A I L
Hudson Quarter, York
Our ability to engage with local communities and
participate in charitable activities has been restricted
this year but we have several events planned during
2022 which the team are excited to be able to
participate in to help local communities and charities.
We have donated £20,000 during the year to
charities, nominated and agreed by the staff.
We have continued to engage with Local Authorities
to understand their priorities and attempt to
support these in conjunction with our own plans.
Our public relations programme focuses on building
relationships with local stakeholders and these strong
and extensive relationships are at the heart of our
business model.
61
STRATEGIC REPORTSTRATEGIC REPORT Annual Report and
Accounts 2022
Governance
62
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 GOVERNANCE
Corporate Governance Report
Governance overview
Board of Directors
Governance Framework
Board Composition and
Division of Responsibilities
Board Activities
Board activities and Committee
attendance
Board performance evaluation
Nominations Committee Report
Environmental Social and Governance
Committee Report
Audit and Risk Committee Report
Directors’ Remuneration Report
Remuneration at a glance
Remuneration policy
Annual Remuneration Report
Directors’ Report and additional
disclosures
Statement of Directors’ Responsibilities
Independent Auditor’s Report to the
members of Palace Capital plc
64
66
68
70
71
72
74
75
76
79
81
85
88
89
93
100
102
103
63
GOVERNANCE Corporate Governance Report
”I have been very keen to understand the views
of our key shareholders and have met with those
holding over 60% of our share register”
Steven Owen
Dear Shareholder,
It is a pleasure to write my first
Chairman’s Governance Report to
you and firstly I would like to thank
Stanley Davis for his contribution to the
governance at Palace Capital plc from
its inception in 2010 to December 2021
when he retired as Chairman.
Letter from
the Chairman
This Report describes in more detail how our current governance
at Palace Capital contributes to the delivery of the Company's
strategy, how we have applied the Principles under the UK
Corporate Governance Code (the 'Code') and have complied with
each of the Provisions under the Code.
A key element to the Board's leadership is that, in line with the
Code, the Board should ensure effective engagement with, and
encourage participation from, shareholders and stakeholders.
I have been very keen to understand the views of our key
shareholders and have met with those holding over 60% of our
share register as part of my induction and subsequently, including
after our Trading Update in April. Those discussions have helped
me, and the other Non-Executive Directors in particular, form
the views as to what shareholders want to see happen for the
Company. Together with the Board and our advisors, we have
discussed these at length, having reviewed the feedback from
shareholders and investigated the options that major shareholders
have suggested. Some of these options have been discussed
previously, including a share buyback programme. Others are
more focused on ways to close the discount to NAV and others are
focused on consolidation in the sector.
I would like to take this opportunity to thank shareholders for this
engagement.
64
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 “The Non-Executive Directors have
spent significant amounts of time
on the Company's business and I
am grateful for their commitment.
They have provided constructive
challenge, strategic guidance,
offered specialist advice and have
held management to account.”
Key to the Board's considerations and our governance is having
a diverse range of backgrounds, gender, age, experience and
cognitive abilities on the Board. The Non-Executive Directors have
spent significant amounts of time on the Company's business
and I am grateful for their commitment. They have provided
constructive challenge, strategic guidance, offered specialist
advice and have held management to account. I believe the
Board and its Committees contain an appropriate combination of
skills, experience and knowledge to be effective at fulfilling our
responsibilities to shareholders and stakeholders.
I have also been pleased with the Company's stance on
Environmental, Social and Governance ('ESG') matters and the
progress made in upgrading our properties, having a plan to
do so or divesting those that do not fulfil our longer term ESG
ambitions. More information on this is provided in our ESG
Committee report from Paula Dillon.
Executive remuneration remains a topical matter and the Non-
Executive Directors have discussed these matters at length to
ensure our policies and practices support strategy and promote
long-term sustainable success. Further information is provided
in the Remuneration Report from Mickola Wilson. Mickola also
describes, in the Nomination Committee Report, the Board
evaluation process and our policy on recruitment including
diversity, and the process for recruiting myself and the internal
promotion of Matthew Simpson as CFO last year. Finally, the Audit
and Risk Committee has been very busy considering the Principal
Risks to the Company and how the Company has mitigated these,
together with the reporting of financial performance. Details are
provided in Kim Taylor-Smith's report.
This year, on 29 July 2022, we expect to hold a physical Annual
General Meeting at which shareholders can attend in person. This
is again being held at our solicitors, Edwin Coe LLP, at 2 Stone
Buildings, Lincoln's Inn, London, WC2A 3TH and I look forward to
meeting retail shareholders then.
Steven Owen
C H A I R
65
GOVERNANCE
Governance
overview
STATEMENT BY THE DIRECTORS ON COMPLIANCE WITH THE UK CORPORATE
GOVERNANCE CODE
The UK Corporate Governance Code 2018 (the code) applied to the Group for the financial year ended 31 March 2022. The Board is
pleased to confirm that it considers that the company has complied with the provisions of the Code.
The Code is publicly available at www.frc.org.uk.
APPLYING THE PRINCIPLES OF THE CODE
SECTION OF THE CODE
HOW WE HAVE APPLIED THE CODE
Board leadership and
Company purpose
The Board is responsible for leading the
business in a way which promotes the long-
term sustainable success of the Company,
generating value for Shareholders and
contributing to wider society.
• The Board establishes the Company’s purpose,
values and strategy and reviews these regularly.
The purpose and vision were updated in
January 2022
• The Board assesses and monitors culture
• There is a regular programme of meetings for the
Board and its Committees
• A formal schedule of matters is reserved for Board
approval and regularly reviewed. This was updated
in March 2022
• The Board has oversight of stakeholder
engagement, including the Workforce
Advisory Panel
Division of responsibilities
• During the year there were three independent
FURTHER
INFORMATION
R E A D A B O U T O U R
G OV E R N A N C E F R A M E W O R K O N
PAG E 7 0
I N F O R M AT I O N O N B O A R D
AC T I V I T I ES A N D C O M M I T T E E
AT T E N DA N C E I S O N PAG E 7 4
E X A M P L ES O F O U R O N G O I N G
STA K E H O L D E R E N G AG E M E N T
I S P R OV I D E D O N PAG ES 7 2
A N D 7 3
The Board includes an appropriate
combination of executive and independent
Non-Executive Directors. The chair leads
the Board and is responsible for its overall
effectiveness in directing the company.
Non-Executive Directors, three Executive Directors
and the Non-Executive Chairman who was
independent on appointment
R E A D A B O U T K E Y
R ES P O N S I B I L I T I ES O N
PAG E 7 1
• The roles of Chair and Chief Executive were not
exercised by the same individual
• The Senior Independent Director and other
Non-Executive Directors provide a sounding
board for the Chair
• The Non-Executive directors provide constructive
challenge, strategic guidance, offer specialist
advice and hold management to account.
66
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 SECTION OF THE CODE
HOW WE HAVE APPLIED THE CODE
Composition, succession
and evaluation
The Nominations Committee ensures
Board appointments are subject to a
formal, rigorous and transparent process.
• All Directors submit themselves at each AGM for
election or re-election to the Board
• The Nominations Committee leads the process
for appointments
• There is an annual evaluation of the performance
of the Board, conducted in December 2021
• Appointments are based on merit and
promote diversity
FURTHER
INFORMATION
T H E N O M I N AT I O N S
C O M M I T T E E R E P O RT I S O N
PAG ES 7 6 TO 7 8
R E A D A B O U T T H E B O A R D ’ S
PE R F O R M A N C E E VA LUAT I O N
O N PAG E 7 5
Audit, risk and internal control
The Audit and Risk Committee monitors
the integrity of the Financial Statements
and oversees the risk management process
and internal control environment.
• The Audit and Risk Committee supports the Board
and advises on whether the Annual Report and
Accounts is fair, balanced and understandable
• There is regular robust assessment of the
Company’s emerging and principal risks
• There are clear policies and processes to ensure
the independence and effectiveness of the external
audit and whether an internal audit is required
R E A D A B O U T R I S K
M A N AG E M E N T O N PAG E 8 4
R E A D T H E AU D I T A N D R I S K
C O M M I T T E E R E P O RT O N
PAG ES 8 1 TO 8 4
Remuneration
Our remuneration policies and practices are
designed to support the business strategy
and promote the long-term sustainable
success of the Company.
• The Remuneration Committee determines the
policy and implementation of Executive Director
and Senior Executive remuneration
• Long-term incentive awards are subject to a total
vesting and holding period of five years
• Pension contribution rates for Executive Directors
were aligned with those available to the workforce
T H E D I R EC TO R S ’
R E M U N E R AT I O N R E P O RT I S
O N PAG ES 8 5 TO 9 9
R E A D A N OV E RV I E W O F O U R
R E M U N E R AT I O N P O L I C Y O N
PAG ES 8 9 TO 9 2
67
GOVERNANCE Board of
Directors
Non-Executive Directors
STEVEN OWEN
Non-Executive
Chairman
MICKOLA WILSON
INDEPENDENT
Non-Executive
Director
Committee membership
Committee membership
KIM TAYLOR-
SMITH
INDEPENDENT
Non-Executive
Director
Committee membership
PAULA DILLON
INDEPENDENT
Non-Executive
Director
Committee membership
Date of appointment
Date of appointment
Joined the Group in 2019
Date of appointment
Joined the Group in 2020
Expertise
Joined the Group in 2014
Expertise
Date of appointment
Joined the Group on
1 January 2022
Expertise
Steven is the Non-Executive
Chairman of FTSE 250
property investment group
Primary Health Properties
plc (“PHP”) having been
Mickola is a Chartered
Surveyor and has over
30 years’ experience in the
real estate market, providing
consultancy, research and
investment management
appointed Chairman in April
advice to the property
fund management industry.
Former head of property
investment at Guardian
Royal Exchange and CEO of
the listed property company,
Teesland plc.
External appointments
• Director of Seven Dials
Fund Management
• Non-Executive Director
of Kent and Medway
Partnership Trust
• Non-executive director
of Mailbox REIT plc
• Member of Mercers
Livery Company Real
Estate Investment
Committee
• Member of the Court of
the Chartered Surveyors
Livery Company
2018. He was appointed
to the PHP Board as an
independent Non-Executive
Director in January 2014
becoming chairman of
the Audit Committee and
Senior Independent Director
in April 2014. Steven has
overseen PHP’s significant
corporate activity in the
period including its merger
with MedicX Fund Limited in
2019 and the internalisation
of its management structure
in January 2021 with both
transactions creating
significant shareholder
value. Steven began his
earlier career with KPMG
before moving into property
with Brixton plc where he
became Finance Director
and subsequently Deputy
Chief Executive.
External appointments
• Chairman of PHP
Expertise
Kim, a Chartered
Accountant, has over
30 years’ experience as
a company director for a
range of businesses. He has
a background in property
management, investment
and development. He was
Finance Director and latterly
Chief Executive of Birkby
plc, a manager of serviced
workspace (IMEX) and
indoor markets (Inshops).
Between 1983 and 1999
Kim continued as Chief
Executive of the enlarged
Group after the agreed
takeover by Mentmore plc,
at that time Europe’s leading
records management and
self-storage company where
he remained until 2001.
More recently, he brings
significant stakeholder
experience and knowledge
Paula is a qualified lawyer
based in Yorkshire who
specialised in the real
estate sector for more than
30 years. During this time,
Paula worked on some of
the largest developments
in the north of England.
Paula recently retired from
Womble Bond Dickinson
LLP, which she joined
in 2013 and where she
spearheaded the growth
of the firm’s Leeds office.
Paula served on the US/
UK board of Womble Bond
Dickinson LLP and was the
board sponsor for diversity
and inclusion.
Paula currently serves as
vice-chair on the board
of the West and North
Yorkshire Chamber
of Commerce.
External appointments
on local and national issues.
• West and North
External appointments
• Deputy Leader,
Kensington & Chelsea
Borough Council
• Bowlhead Properties
Group
Yorkshire Chamber of
Commerce
• Leisure and Hotel
Investment Limited
• Grant Thornton LLP
68
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Executive Directors
Committee membership
Audit and Risk Committee
Remuneration Committee
Nomination Committee
ESG Committee
MATTHEW
SIMPSON FCCA
Chief Financial Officer
Committee membership
RICHARD STARR
MRICS
Executive Property
Director
Committee membership
Date of appointment
Appointed as Chief Financial
Date of appointment
Officer in November 2021
Joined the Group in 2013
Expertise
Expertise
Matthew is a Chartered
Certified Accountant and
has been with the Company
since 2016. Previously
Richard has extensive
property experience
including sourcing and
managing commercial
holding the position of Head
investments throughout the
of Finance and Operations,
Matthew was appointed as
Finance Director Designate
on 13 August 2021.
Prior to joining the Company,
Matthew held various
finance roles, including at
CIT Group Partners LLP and
PricewaterhouseCoopers.
Responsible for the
implementation of the
Group's financial strategy,
investor relations, debt
financing arrangements and
all aspects of accounting and
taxation.
External appointments
• None
UK. After qualifying as a
Chartered Surveyor in 2000,
he gained his experience
working in a diverse portfolio
of central London based
property firms including
the corporate real estate
division of what is now CBRE
Global Investors. In 2011 he
established his own boutique
property consultancy,
successfully negotiating sales
and acquisitions on behalf of
a wide variety of institutional
and private clients before
joining the Board of Palace
Capital in October 2013,
when the Signal portfolio
was acquired.
Responsible for the asset
management delivery and
operational strategy for the
Group’s properties.
External appointments
• Acorn2Oak Property
Advisors Limited
Board composition
Stanley Davis stood from the Board on 31 December 2021
Stephen Silvester stood down as CFO on 29 October 2021
Matthew Simpson appointed CFO on 11 November 2021
Steven Owen appointed as Chairman on 1 January 2022
Neil Sinclair will stand down as CEO with effect from 14 June 2022
69
GOVERNANCE
Governance
framework
BOARD AND COMMITTEES
BOARD OF DIRECTORS AS AT 31 MARCH 2022
Chairman: Steven Owen
Comprised: Three Executive Directors and four Non-Executive Directors (including the Chairman)
Role: Collectively responsible for devising the purpose, vision and long-term strategy and overseeing
its implementation to promote the long term sustainable success of the company, generating value
for shareholders and contributing to wider society.
BOARD COMMITTEES
AUDIT AND RISK
COMMITTEE
REMUNERATION
COMMITTEE
NOMINATIONS
COMMITTEE
ESG COMMITTEE
Chair:
Chair:
Chair:
Chair:
KIM TAYLOR-SMITH
MICKOLA WILSON
MICKOLA WILSON
PAULA DILLON
Comprises:
Comprises:
Comprises:
Comprises:
Three independent
Three independent
Three independent
Three Independent
Non-Executive Directors
Non-Executive Directors
Non-Executive Directors
Non-Executive Directors,
and Chairman
and Chairman
Chairman, the Chief
Financial Officer and the
Executive Property Director
Role:
Role:
Role:
Role:
• Monitor and oversee
financial reporting
• Monitor risk
management and
internal controls
• Oversee external
auditors and the
audit process
• Set Remuneration
policy and oversee
its implementation
• Review Directors’
remuneration
packages and
incentives
• Approve bonus and
LTIP targets
• Recommend Board
appointments
• Succession planning
• Board composition
skills and diversity
• Board performance
evaluation
• Develop the strategy
for ESG matters
and oversee its
implementation
• Stakeholder
engagement
70
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Board composition and division
of responsibilities
KEY RESPONSIBILITIES
Chairman
• Leads the Board.
• Sets the Board agenda and meeting schedule. Oversees the
culture of the Board including diversity of opinion, ensures all
the Directors are properly briefed and are able to take a full
and constructive part in Board discussions
• Responsible for evaluating the performance of the Board
and of the Executive management and of the other
Non-Executive Directors
• Engage with advisors and meet with shareholders to
understand their concerns and views and consider implications
for the strategy of the Company
Senior Independent Director
BOARD COMPOSITION AT 31 MARCH 2022
Gender diversity
Male
Female
• Provides a sounding board for the Chairman and serves as an
intermediary for the other Directors
• Available to discuss concerns with Shareholders that cannot be
resolved through the normal channels of communication with
the Chairman or the Chief Executive
2
• Responsible for leading the annual appraisal of the
Chairman’s performance
Independent Non-Executive Directors
• Bring wide perspectives and experience, to provide
independent judgement and objectivity to the Board’s
deliberations and decision making
• Scrutinise and hold to account the performance of
management and individual Executive Directors against
agreed performance objectives
• Have a prime role in appointing and removing
Executive Directors
5
Independence
Independent
Non-independent
Chairman (independent on appointment)
1
3
3
Board tenure
Under 3 years
3 to 6 years
Over 7 years
3
2
1
71
GOVERNANCE Board
activities
Strategic aims
1 Refocus our regional portfolio
2 Generate attractive total
returns
3 Manage our assets effectively
4 Be a responsible company
Stakeholders and s172
1 Investors
2 Tenants
3 Employees
4 Suppliers, agents
and consultants
5 Communities and
the environment
ENGAGING WITH OUR
INVESTORS AND OUR
LENDERS
TENANTS
•
Ensure compliance
• Meet the Company’s
• Maintain positive dialogue
•
Ensure workforce policies and
and implementation of
responsibilities to Shareholders
requirements of the UK Code
and banks
•
Support our tenants as they
navigated the pandemic
practices are consistent with the
Company’s values
•
Retirement of Chair,
• Approved the increase to
• Monitored our tenant risk
•
Received feedback from the
• Consider shareholder feedback
•
Ensure a robust programme of
from the 2021 AGM
investor relations
• Onboarding of a new Chairman
• Continue our proactive
•
Review the implications of ESG
and CFO
matters
engagement
appointment and onboarding
dividends and the Company’s
profile
of new Chair and Chief
ongoing dividend policy
• Approved capital expenditure
Financial Officer
•
Received updates from
in relation to Bank House,
• Monitored compliance with
management following
Leeds
Code and Company law and
presentations to investors at
regulatory requirements
the half and full year
•
Received regular reports from
the Executive Property Director
•
Revised the Corporate Social
•
Received input from the
in relation to rent collection
Responsibility Committee to
Company’s brokers in relation
and Covid-19 engagement
become a new Environmental
to Shareholder attitudes to
responses
Social and Governance
the Company and investor
Committee with new Terms
feedback
•
Reviewed feedback from
tenants following Biennial
• Met with top shareholders as
survey
of Reference to consider and
oversee implementation of the
Group’s ESG strategy
•
Performed an internally
facilitated evaluation of the
Board and its Committees.
•
Received updates on corporate
and regulatory changes and
reporting requirements
part of the Chairman’s induction
and ongoing dialogue
• Kept our lenders regularly
updated in respect of income
and capital values
•
Ensure a safe working
environment and compliance
with government social
distancing guidelines
•
Ensure availability of facility for
workforce to raise concerns
Workforce Advisory Panel
and acted upon this including
in relation to performance
and potential future strategic
direction
• Discussed the Company’s
Purpose, Vision and future
strategy and received input
from the workforce
• Monitored employee
engagement, training and
development
• Monitored the Group’s
approach to employee
remuneration and investing in
and rewarding the workforce
• Continued to monitor key
indicators in relation to the
Group’s culture, purpose and
F U RT H E R I N F O R M AT I O N O N
T H E G R O UP ’ S A PP R O AC H TO
STA K E H O L D E R E N G AG E M E N T,
I N C LU D I N G T H E B O A R D ’ S
S EC T I O N 1 7 2 STAT E M E N T, O N
PAG E 4 4
3 4
2
values
3 4
3
ACTIVITY
STRATEGY
FINANCIAL
GOVERNANCE
ENGAGING WITH OUR
OUR WORKFORCE
Key priorities
•
Promote the long-term
sustainable success of
the Company
• Generate value for
Shareholders
•
Strengthen the balance sheet
• Competent and prudent
financial management,
reducing the Loan to
Value ratio
•
Implement a £30m disposal
strategy to realign the Group
• Maximise liquidity and enable
progressive covered dividend
Key activities and
discussions
• Closing the NAV gap
• Appropriate and prudent
capital allocation
• Oversaw the successful
•
•
Ensure the integrity of the
Financial Statements
Regularly reviewed the
Group’s financial position and
rolling forecasts
• Overseeing the refinancing of
execution of the disposal
strategy
•
• Approved strategic
acquisitions eg Maidenhead
• Monitored the wider
pandemic and implications,
the economic environment
and market outlook
• Monitored trading
performance throughout
the year
• Monitored the performance
of the portfolio and individual
asset valuations
the Santander facility
Reviewed and approved
half-yearly and annual results,
viability statement and going
concern matters
• Approved the budget for 2022
• Monitored rent collection
• Monitored capital expenditure
and significant refurbishment
projects
• Monitored the progression
of Hudson Quarter and
compliance of the Barclays
development loan, which was
repaid in November 2021
Link to
strategy
Link to
s172 stakeholder
1 2 3 4
2 3
1 2 3 4
1 2 4
1 2 3 4 5
1
1 2 3 4 5
1
72
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 ACTIVITY
STRATEGY
FINANCIAL
GOVERNANCE
ENGAGING WITH OUR
INVESTORS AND OUR
LENDERS
ENGAGING WITH OUR
TENANTS
OUR WORKFORCE
Key activities and
discussions
sustainable success of
the Company
• Generate value for
Shareholders
• Competent and prudent
financial management,
reducing the Loan to
Value ratio
•
Implement a £30m disposal
• Maximise liquidity and enable
strategy to realign the Group
progressive covered dividend
•
Ensure the integrity of the
Financial Statements
• Closing the NAV gap
•
Regularly reviewed the
• Appropriate and prudent
capital allocation
• Oversaw the successful
execution of the disposal
Group’s financial position and
rolling forecasts
• Overseeing the refinancing of
the Santander facility
strategy
•
Reviewed and approved
• Approved strategic
acquisitions eg Maidenhead
• Monitored the wider
pandemic and implications,
half-yearly and annual results,
viability statement and going
concern matters
• Approved the budget for 2022
the economic environment
• Monitored rent collection
and market outlook
• Monitored capital expenditure
• Monitored trading
and significant refurbishment
performance throughout
projects
the year
• Monitored the progression
• Monitored the performance
of Hudson Quarter and
of the portfolio and individual
compliance of the Barclays
asset valuations
development loan, which was
repaid in November 2021
Key priorities
•
Promote the long-term
•
Strengthen the balance sheet
•
Ensure compliance
and implementation of
requirements of the UK Code
• Consider shareholder feedback
•
from the 2021 AGM
• Meet the Company’s
• Maintain positive dialogue
responsibilities to Shareholders
and banks
Ensure a robust programme of
investor relations
•
Support our tenants as they
navigated the pandemic
• Onboarding of a new Chairman
• Continue our proactive
and CFO
engagement
•
•
Review the implications of ESG
matters
Retirement of Chair,
appointment and onboarding
of new Chair and Chief
Financial Officer
• Monitored compliance with
Code and Company law and
regulatory requirements
•
•
•
Revised the Corporate Social
Responsibility Committee to
become a new Environmental
Social and Governance
Committee with new Terms
of Reference to consider and
oversee implementation of the
Group’s ESG strategy
Performed an internally
facilitated evaluation of the
Board and its Committees.
Received updates on corporate
and regulatory changes and
reporting requirements
• Approved the increase to
• Monitored our tenant risk
•
•
dividends and the Company’s
ongoing dividend policy
Received updates from
management following
presentations to investors at
the half and full year
Received input from the
Company’s brokers in relation
to Shareholder attitudes to
the Company and investor
feedback
• Met with top shareholders as
part of the Chairman’s induction
and ongoing dialogue
• Kept our lenders regularly
updated in respect of income
and capital values
profile
• Approved capital expenditure
in relation to Bank House,
Leeds
•
•
Received regular reports from
the Executive Property Director
in relation to rent collection
and Covid-19 engagement
responses
Reviewed feedback from
tenants following Biennial
survey
F U RT H E R I N F O R M AT I O N O N
T H E G R O UP ’ S A PP R O AC H TO
STA K E H O L D E R E N G AG E M E N T,
I N C LU D I N G T H E B O A R D ’ S
S EC T I O N 1 7 2 STAT E M E N T, O N
PAG E 4 4
•
•
•
•
Ensure workforce policies and
practices are consistent with the
Company’s values
Ensure a safe working
environment and compliance
with government social
distancing guidelines
Ensure availability of facility for
workforce to raise concerns
Received feedback from the
Workforce Advisory Panel
and acted upon this including
in relation to performance
and potential future strategic
direction
• Discussed the Company’s
Purpose, Vision and future
strategy and received input
from the workforce
• Monitored employee
engagement, training and
development
• Monitored the Group’s
approach to employee
remuneration and investing in
and rewarding the workforce
• Continued to monitor key
indicators in relation to the
Group’s culture, purpose and
values
Link to
strategy
Link to
s172 stakeholder
1 2 3 4
2 3
1 2 3 4
1 2 4
1 2 3 4 5
1
1 2 3 4 5
1
3 4
2
3 4
3
73
GOVERNANCE Board activities and
Committee attendance
The Board has a culture of diligent preparation for meetings,
The Directors’ interests in the shares of the Company are set out
whether virtual or in person, by the Non-executive Directors. This
on page 96. The Board met nine times during the financial year
includes pre-meetings without Executives present, constructive
in accordance with its usual meeting programme. A number of
discussion and challenge. The Non-Executive Directors are
further meetings were convened to deal with specific strategic and
considered to be independent and free from any relationship that
corporate matters.
could affect the exercise of their independent judgement. It is felt
that their knowledge and understanding are fundamental to the
Board’s deliberations. The Board is led by the Chairman.
The Board has a schedule of matters reserved for its approval
which includes material capital commitments, acquisitions and
disposals and Board appointments. This was reviewed in the
The profiles of the Board members can be found on pages 68 and
year and updated for best practice matters, in line with the
69 of this Report. They demonstrate a complementary diversity of
Code. Directors are given information for each Board meeting,
skills, backgrounds and experience, which enables the Group to be
including reports on the current financial and trading position and
led effectively.
the papers are considered carefully. In the year, suggestions for
development of papers were incorporated, including the use of
a new Board portal for improved access and communication.
BOARD1
AUDIT AND
RISK
REMUNERATION
NOMINATIONS
ESG
Steven Owen
(Chairman)
Neil Sinclair4
Richard Starr
Matthew Simpson
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Stanley Davis2
Stephen Silvester3
2/2
9/9
9/9
3/3
9/9
8/9
9/9
7/7
4/4
–
–
–
–
3/3
3/3
3/3
–
–
1/1
–
–
–
3/3
3/3
3/3
–
–
–
–
–
–
1/1
1/1
1/1
1/1
–
1/1
–
2/2
1/1
2/2
2/2
2/2
–
–
1
In addition to scheduled Board meetings noted above, the Board held numerous ad hoc meetings virtually and in person during the year to discuss
specific strategic and operational topics
2 Retired from the Board December 2021
3 Resigned from the Board October 2021
4 Stepped down from the Board June 2022
CULTURE
The Board has overall responsibility for establishing the Company’s purpose and strategy and satisfying itself that these and the
Company’s culture are aligned.
The Executive management team drives the embedding of the desired culture throughout the organisation and ensures that the
expected values and beliefs are sufficiently understood and upheld.
During the year, the Board updated the Company’s Purpose and Vision, taking into account the input and views of the workforce via the
Workforce Advisory Panel. In addition, the Board keeps the values, beliefs, policies and practices that encapsulate the Group’s culture
under review. It assessed reports from management and the output of the Workforce Advisory Panel. It monitored adherence to Group
policies and compliance with the corporate governance requirements of the Company and under the Code and regulatory requirements.
For further information regarding the Company’s approach to investing in and rewarding its workforce, please see page 92.
74
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Board performance
evaluation
BOARD PERFORMANCE
EVALUATION
During the year, the Board conducted
an internal evaluation of its performance
following an external evaluation conducted
by ICSA Board Evaluation Services in 2019.
The 2021 review process took place
throughout December 2021 and was
led by the Chairman and the Senior
Independent Director with support from
the Company Secretary.
As part of the review, the Board
considered progress against the previously
agreed actions as well as its response
to Covid-19 and any other areas for
development in relation to key aspects of
the Board’s performance.
PROCESS
The evaluation was conducted via
a questionnaire following a set of
predetermined questions agreed with
the Chairman and Senior Independent
Director, having regard to the provisions of
the UK Code.
Once agreed, a questionnaire was sent
to each Board member to obtain their
feedback. The questionnaire covered eight
key aspects of the Board’s performance:
• Board responsibilities
• Oversight
• Board meetings
• Support for the Board
• Board composition
• Working together
Stage 1
The Board agreed the format of the evaluation and following this the Chairman and
the Senior Independent Director met with the Company Secretary to devise a list of
questions and areas that the evaluation should cover.
The process included a review of the effectiveness of the Board’s main committees.
Stage 2
Each Director completed a questionnaire in relation to eight key aspects of the
Board’s performance. Committee members and other attendees received tailored
questionnaires which considered the effectiveness of each one of the Board’s
committees.
Stage 3
A final report was compiled and shared with the Board.
Stage 4
Following Board discussion and debate, a range of actions were agreed. An action
plan has been prepared on the basis of the actions outlined below and progress will
be monitored during the next financial year. Key themes for discussion include ESG,
succession planning and ensuring regular reviews of Board composition.
Stage 5
The action plan will reviewed during FY23 and updated as appropriate
Key Recommendations in the Board Evaluation
• Outcome and achievements
RECOMMENDATIONS AND ACTIONS
The questionnaire also considered
the Board's views on the material ESG
issues facing the Company. In addition
the process included a review of the
effectiveness of the Remuneration,
Nomination, Audit and Risk Committees.
The questionnaire was completed by all
Directors during December 2021 and
a report was compiled based on the
findings. This was initially shared with the
Chairman and the Chief Executive before
being presented to the Board.
• The Board should seek to define the
Board’s risk appetite and tolerance.
• The Board should consider ways to
continue to monitor culture.
• The Board should consider ways
in which the Board can review the
Company’s supply chain and related
risks to performance and reputation.
• The Nominations Committee should
keep directors’ skills and knowledge
and any training requirements under
regular review
• The Nominations Committee should
keep directors’ skills and knowledge
and any training requirements under
regular review.
• Succession planning for the Executive
Directors should be kept under review
with updates to the whole Board.
• The Board should expand the
time horizon over which strategy
discussions are based.
75
GOVERNANCE Nominations
Committee Report
“The Nominations
Committee leads
the process for
appointments to the
Board and oversees
plans for succession.”
Members
• Mickola Wilson (Chair)
• Kim Taylor-Smith
• Paula Dillon
• Steven Owen
Total meetings held:
One
Mickola Wilson
C H A I R O F N O M I N AT I O N S C O M M I T T E E
KEY ACHIEVEMENTS
DURING 2021/22
AREAS OF FOCUS FOR
2022/2023
• Leading search for and successful
Succession plans
appointment of new CFO and Chair
• Board Evaluation
Director training and development
Dear Shareholder,
In accordance with the UK Code, at least a majority of members
of the Committee are Independent Non-Executive Directors.
We welcomed Steven Owen to the Committee following his
appointment as Chairman in January 2022. Mr Owen, was
considered independent upon his appointment as Chairman. The
Executive Directors may attend Committee meetings by invitation.
The Committee met formally once during the year (details of
attendance are set out on page 74) and held several informal
meetings in relation to the appointments to the Board and
evaluation processes. The Nominations Committee leads
the process for appointments to the Board and overseas the
plans for orderly succession to both the Board and senior
management positions.
The Committee has kept the structure and composition of the
Board under regular review to ensure it has the right balance of
skills, knowledge, experience and diversity to carry out its duties
and provide effective leadership.
BOARD CHANGES
Appointment of Chairman
The Board noted the 20% votes against the re-election of Stanley
Davis at the 2021 AGM, and, in line with best practice, engaged
with shareholders further to consider an appropriate response.
We agreed with Stanley that, having served over nine years on the
Board, that he would step down from the Board upon finding a
suitable replacement. Initially, this was proposed for October 2021
but Stanley kindly stayed on until the end of the calendar year in
order for the Nominations Committee to conclude its search for
a replacement as Chair. Mr Davis was not involved in the search
for his successor. We are very grateful to Stanley for his leadership
over the time since he formed the Company in 2010.
The Committee is very conscious of the issues of diversity and
gender diversity in particular. Our general policy is to appoint the
best candidate for the role but take into consideration the need
to consider people from, for example, a range of ages, gender,
educational or professional backgrounds and ethnicity. For the
appointment of the Chairman, we engaged Warren Partners
who also provide executive coaching to one of the Executive
Directors. Warren Partners are a signatory to the executive search
firms voluntary code. As part of their brief, we requested that they
should include a significant proportion of suitable female candidates
for review and consideration. Ultimately, we believed that the
best candidate, taking into account their experience, background,
leadership and cognitive skills was Steven Owen. We encourage
management to also consider such issues of diversity when recruiting
internally, irrespective of the role level.
76
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Appointment of Chief Financial Officer
In addition to overseeing the process for the appointment of a new independent Chair,
the Committee also oversaw the appointment of Matthew Simpson as CFO. Matthew had
been Financial Controller since joining the Company in 2016 then acting Finance Director
while the Committee reviewed the appointment on a permanent basis. Matthew brought
valuable experience of the Company, its culture and markets and working with the other
Executive Directors. We welcome Matthew's appointment which was in line with the
Group's succession plans, as overseen by the Committee.
The Committee continued to monitor the Company’s succession plans for the other
Executive Directors and senior management and oversaw specific training requirements in
this regard including executive coaching and development.
Chief Executive
In line with the Committee's focus on succession planning, the Committee agreed with
Neil that he would step down from the Board. We agreed that Steven Owen would
become Interim Executive Chairman.
EVALUATION
A formal and rigorous internal evaluation of the Board’s performance was carried out
during the year, the process and findings of which are set out on page 75. The Committee
oversaw the evaluation process ensuring that a clear action plan was put in place.
The Committee is satisfied that the Board has a strong group of people from
different backgrounds and experience which provides for robust debate and effective
decision making.
AGM
In accordance with the Code, each of the Directors will submit themselves for election
or re-election at the 2022 AGM. The Committee, on behalf of the Board, is satisfied that
all Board members put forward for election or re-election have, and commit, the time
required to discharge their roles effectively. The Committee believes that the Board
has the appropriate balance of skills, experience, independence and knowledge and
Shareholders are requested to support the resolutions.
Mickola Wilson
C H A I R O F N O M I N AT I O N S C O M M I T T E E
13 June 2022
77
GOVERNANCE Nominations
Committee Report CONTINUED
Steven Owen
C H A I R M A N
NEW DIRECTOR INDUCTION
For the induction of Mr Owen as Chairman, a formal schedule of relevant and
tailored information was provided. The objective was to provide him as a new
Director of the Company with the information he needed to become as effective as
possible in his new role within the shortest practicable time.
The induction process was designed to achieve three goals:
• Build an understanding of the nature of the company, its business and the
markets in which it operates
• Build a link with the company’s people
• Build an understanding of the company’s main relationships
The aim of an induction was also to ensure an understanding of the framework
within which the Board and its committees operate.
Acknowledging that it is not possible to design a single programme to suit all
circumstances, the programme was therefore tailored to the needs of a specific
individual, recognising Mr Owen’s existing role as Chairman of a FTSE250
company. In addition to meetings with key stakeholders, reference materials were
also made available to Mr Owen and all Directors going forwards via the new
Board portal, introduced in the year.
DIRECTOR REFERENCE
DOCUMENTS INCLUDED:
• Board and Committees including Matters Reserved for the
Board and Terms of Reference
• Board meetings including scheduled dates, cycle of matters
considered at meetings and recent minutes
• Rules, regulations and guidance including Company
adopted Policies
• Board procedures
• Current issues
• The nature of the company, its business and its markets
• The Company’s main relationships
• Useful documents/information
In addition, as a member of Board Committees, the Chairman was
provided with information on each Committee such as:
• Role and remit of the committee
• Link between the committee’s policy and the company’s
strategic objectives
• The annual meeting schedule for the Committee
• The main business conducted by the Committee
• The legal requirements relevant to the Committee’s operations
• Market practice and current trends relevant to the Committee
• Current issues
• Views of investors on matters considered by the Committee
and potential areas of focus
• Any technical training on key matters.
78
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Environmental Social and Governance
Committee Report
“The primary
responsibilities of the
ESG Committee is to
oversee the design,
implementation
and embedding of
the Group’s ESG
strategy.”
Paula Dillon
C H A I R O F ES G C O M M I T T E E
Members
• Paula Dillon (Chair)
• Mickola Wilson
• Kim Taylor-Smith
• Richard Starr
• Matthew Simpson
• Steven Owen
Total meetings held:
Two
KEY ACHIEVEMENTS
DURING 2021/22
AREAS OF FOCUS FOR
2022/2023
• Reviewed ESG developments in the
sector and the Company’s strategy
The ongoing remit and focus of the
Environmental, Social and Governance
• Oversaw the governance of
(‘ESG’) Committee is to oversee the
ESG matters
Company’s response to the evolving
• Considered the risks of climate change
and its elevation by the Board to it
being a Principal Risk
environmental, health and safety, corporate
social responsibility, corporate governance,
sustainability, and other public policy
• Reviewed the development of
matters relevant to the Company. Its
each of the E, S, and G narrative
by the Company
• Progressed the TCFD
disclosure framework
primary responsibility is to oversee the
formulation and discharge of the Group’s
corporate and social responsibilities
and ensure its social, environmental and
• Obtained specialist advice on
economic activities are aligned.
ESG matters
Dear Shareholder,
COMMITTEE ROLE
The Committee met twice during the year, in line with its Terms
The Committee’s terms of reference set out its role and the
of Reference and the Group’s ESG strategy. The meeting agendas
included updates from management in relation to the progress
against the Board’s ESG strategy and its three fundamental
objectives, which are to:
• Future-proof the portfolio
• Foster a culture of inclusivity and consideration of
stakeholders’ interests
• Be a responsible business
authority delegated to it by the Board. The primary responsibilities
of the Committee are to:
• Define the Group’s corporate and social obligations, agree a
strategy for discharging these and oversee the implementation
of such strategy.
• Ensure there is recognition of the impact of the Group’s
activities on all stakeholders, monitor the engagement
with each stakeholder group and support the Board in its
understanding of the interests of key stakeholders.
The following pages set out the key responsibilities and activities
•
of the Committee in its oversight role. For more information on the
Group’s activities in this area, please see the Strategic Report.
In conjunction with management, the Board and other
Committees, identify the material social and environmental
risks and ensure that appropriate measures are taken to
mitigate such risks.
79
GOVERNANCE Environmental Social and Governance
Committee Report CONTINUED
STRATEGY AND LINKAGE TO ESG
ESG STRATEGY
Palace Capital has made good progress during the year and has
Climate change and energy use pose one of the highest ESG
taken steps to ensure that ESG matters are being more actively
risks and potential opportunities for the Palace Capital Group.
considered. Palace Capital is on the road to better understanding
A key aspect of the ESG strategy is therefore centred on the
its carbon footprint, has started to ensure that environmental
environmental performance of the Group’s assets and future-
factors are part of its refurbishment and new acquisition planning
proofing the portfolio to ensure the business is able to adapt to
and is taking positive action to improve its EPC ratings, has made
changing occupier demands. The updated Principal Risk Register
an initial submission to the Carbon Disclosure Project and has
(see pages 40 to 43) now includes such risks to the Company. The
improved its level of ESG reporting.
Committee believes that management have made good progress
Looking forward, the Committee believes that the Company is
well placed to develop the commercial opportunities associated
in the year to embed ESG considerations into the business,
though work continues to develop this.
with ESG and to consider areas where it might have positive
The Committee has reviewed the processes for collecting data in
social impacts.
In terms of governance, we are pleased that the ESG Committee
has been constituted and has provided focus on ESG matters and
for Palace Capital to consider risks and opportunities regarding
potential future climate change scenarios. The Committee will
continue to review the way in which the business is conducted
and seek to ensure this is done in a responsible manner while
acknowledging that there are challenges and opportunities for the
Company over ESG matters going forwards.
Responsible business initiatives have included setting targets and
relation to the environmental performance of the Group’s assets,
which have been enhanced further during the year and embedded
in the Company’s processes. A key priority for the Committee
over the next year is to ensure that clear and measurable
targets are reviewed and set particularly in the context of the
recommendations made by the Task Force on Climate-related
Financial Disclosures framework (TCFD) and the roadmap and
plans for the Company to achieve net-zero.
STAKEHOLDER ENGAGEMENT
objectives against which performance can be measured. One such
Stakeholder engagement has been a significant theme throughout
measure is the Group’s greenhouse gas emissions, and in line with
the year. The Committee has received updates in relation to the
the Companies Act 2006, we have set out our greenhouse gas
Group’s culture and engagement with the workforce and has
emissions report on the next page.
monitored the approach to tenants in response to the Covid-19
pandemic. During the year, a tenant satisfaction survey was
undertaken, the outcome of which was positive but the Company
acknowledged that this was from a relatively small number of
tenants’ responding. Further engagement work with tenants is
therefore proposed going forwards.
The Workforce Advisory Panel forms a significant part of
the Group’s ESG strategy. Specific actions and initiatives are
channelled through the panel for employees to input and develop.
This not only helps embed our ESG practices, but it also provides
the Board with further insight into the views of the workforce.
Paula Dillon
C H A I R O F ES G C O M M I T T E E
13 June 2022
80
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Audit and Risk
Committee Report
“Overall, we are
pleased with the
Company's robust
reporting processes
and its approach
to considering
and mitigating its
Principal Risks.”
Members
• Kim Taylor-Smith (Chair)
• Mickola Wilson
• Paula Dillon
Total meetings held:
Two
Kim Taylor-Smith
C H A I R O F AU D I T A N D R I S K C O M M I T T E E
KEY ACTIVITIES
DURING 2021/22
• Reviewed and approved the annual
and half-yearly financial statements
• Ensured that the Annual Report was
fair, balanced and understandable
• Scrutinised potential transactions and
property valuations
• Full and mid-year risk reviews
• Considered the appointment of the
external Auditor, their reports to the
Committee and their independence
AREAS OF FOCUS FOR
2022/2023
• The Committee will meet with
the valuers to further review their
independent valuations for the full year
and half year
• The Committee will review the possible
capital costs of ESG matters and the
Company's provision of these
Dear Shareholder,
The remit of the Committee is to assist the Board in its oversight
and assurance roles, ensuring that the annual report and
accounts are fair balanced and understandable and provides the
Wakefield, in March 2022 and our independent external auditor,
BDO, have not included any emphasis of matter in their audit
report this year. Overall, we are pleased with the Company's
robust reporting processes and its approach to considering and
mitigating its Principal Risks, as described more fully on pages
information necessary for shareholders to assess the Company's
39 to 43.
position, performance, business model and strategy.
The Committee has supported the Board by monitoring the
integrity of the Company's financial and narrative reporting and
the robustness of the Group’s risk management and internal
control framework, taking into account that the Company does not
have an internal audit function. Due to the size and relative lack
of complexity of the business, the Committee recommended to
COMPOSITION
In accordance with the UK Code, all members of the Committee
are Independent Non-Executive Directors. The Non-Executive
Chairman and Executive Directors may attend Committee
meetings by invitation.
the Board that no internal audit function was required. We have
The Committee is satisfied that I, Kim Taylor-Smith, a Chartered
however, worked closely with the external auditors, reviewing key
Accountant, bring recent and relevant financial experience and
accounting judgements and policies, and ensuring an effective
considers that all members have the necessary competence
external audit process. I am pleased to report that no material
relevant to the sector in which the Company operates, as required
uncertainty disclosure has been included in the valuations
by the UK Code.
issued by the independent valuer of our properties, Cushman &
81
GOVERNANCE Audit and Risk
Committee Report CONTINUED
COMMITTEE ROLE AND
EFFECTIVENESS
FINANCIAL REPORTING AND
SIGNIFICANT MATTERS
The Committee’s terms of reference set
As part of its role, the Committee has
out its role and the authority delegated
considered a number of significant issues
to it by the Board including reviewing
relating to the financial statements. This
and monitoring:
• The integrity of the financial
statements.
• The Company’s system of internal
controls and risk management.
• The identification and management of
the Group’s principal risks.
• The external audit process and
relations with Auditors.
The performance of the Committee was
includes the suitability of accounting
policies and the appropriateness of
management’s judgements and estimates.
The Group’s accounting policies can be
found in the notes to the consolidated
financial statements and further
information on the significant issues
considered by the Committee is set
out below.
Property valuations
reviewed as part of the Board’s annual
The valuation of the Group’s properties
evaluation process. This concluded that
and the determination of their fair value
the Committee members demonstrate
is one of the most critical elements of the
sufficient time commitment, has at least
annual and half-year financial results. The
one member having recent and relevant
Committee reviews the valuations and the
financial experience and the Committee as
underlying assumptions and judgements
a whole has competence relevant to the
applied by management and Cushman
sector in which the company operates. In
& Wakefield. The Committee receives
addition, the meeting cycle, agenda items
information on the valuation process
and information provided are considered
and reviews updates from management
appropriate and meetings are conducted
in relation to current market trends and
effectively, with sufficient time spent on
key valuation movements compared to
significant or emerging issues.
previous periods. The Committee provides
Overall, the conclusion of the performance
review was that the Committee is effective
and provides appropriate support to
the Board.
robust challenge and satisfies itself that
sufficient oversight and controls are in
place and that the financial reporting
is supported.
Recoverability of receivables
The impact of Covid-19 on our tenants was
significant and this led to some tenants
falling into arrears. The Committee was
pleased with the asset management
team's approach to working with tenants
to maintain high levels of payment.
Going concern
The Committee reviewed whether it
was appropriate to adopt the going
concern basis in the preparation of the
financial statements. In considering this,
the Committee reviewed the Group’s
12-month cashflow forecasts, availability
of bank facilities and the headroom
under the financial covenants in our debt
arrangements. With this knowledge, and
following the review, the Committee
recommended to the Board that it was
appropriate to adopt the going concern
basis of preparation.
Viability statement
The Committee reviewed the viability
statement and the period for which the
Board should assess the prospects of
the Group. Following the review, the
Committee concluded that a three-year
period was appropriate, in line with the
Company's internal forecasting horizon.
Further details are provided on page 38.
INTERNAL CONTROL FRAMEWORK
Governance
Framework
Strategic
Framework
Risk
Management
Framework
Assurance
Framework
82
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Fair, balanced and understandable
EXTERNAL AUDITOR
The Committee has considered whether the Annual Report is
BDO LLP was first appointed as external Auditor in respect of the
fair, balanced and understandable and provides the information
year ended 31 March 2015. There are no current plans to carry
necessary for Shareholders to assess the Company’s position and
out a re-tender exercise, but in accordance with the EU Audit
performance. In forming its opinion, the Committee considered
Regulation and Directive, the Group will be required to put the
whether the Annual Report provided a comprehensive review
external audit contract out to tender by 2024.
The Committee has assessed BDO’s performance, independence,
objectivity and fees, as well as the effectiveness of the audit
process. In making its assessment, the Committee considered
the qualifications, expertise and resources of the audit partner
and team as well as the quality and timeliness of the delivery
of the audit and the provision of non-audit related services.
The Committee members made their assessment based on
feedback from management, their own interaction with the audit
team and assurances provided by the Auditor in relation to
their independence.
In the year ended 31 March 2022, the only non-audit services
provided to the Group related to the independent review of the
half-year results. The Committee will only authorise non-audit
services on the basis that they are permissible under regulations
relating to a Public Interest Entity and the Company has a formal
non-audit services Policy that it adheres to.
AUDIT FEES
Fees payable to the Group’s Auditors for audit and non-audit
services are set out in note 3 on page 126. Total fees related to
non-audit services represented 5.4% of the total fees for audit
services (2021: 5.6%).
of matters in the year, both positive and negative, included
all relevant financial transactions and balances, was consistent
throughout and had been written in straightforward language
without unnecessary repetition. The Committee was satisfied
that, taken as a whole, the Annual Report is fair, balanced
and understandable.
“The Committee has
assessed BDO’s performance,
independence, objectivity and
fees, as well as the effectiveness
of the audit process.”
Hudson Quarter,
York
83
GOVERNANCE RISK MANAGEMENT AND
INTERNAL CONTROLS
The Board is responsible for the Group’s risk management and
internal control systems. To support the Board, the Committee
oversees and at least annually reviews the effectiveness of
the Group’s internal controls and risk management systems
INTERNAL AUDIT
Given the size of the Group, in the opinion of the Committee,
there is currently no requirement for an internal audit function.
The work of the external Auditor provides an element of comfort
that controls are operating as intended and the management
team regularly review the operation of the Group’s policies
and reviews / approves the related statements in the Annual
and procedures.
Report. During the year the Committee received updates from
management and the external Auditor regarding the operation
of key controls. As part of their review the Committee also
considered the process of risk identification, mitigation and
evaluation of the potential impact on the Group’s strategic
objectives. The Directors are satisfied that the current controls are
effective with regard to the size of the Group.
The internal controls are designed to ensure the reliability of
financial information for both internal and external purposes.
However, they can only provide reasonable, but not absolute
assurance against material misstatement or loss.
WHISTLEBLOWING PROCEDURES
The Audit and Risk Committee reviews arrangements whereby
employees may in confidence raise concerns, which are detailed in
the Company’s Employee Handbook. During the year no concerns
were raised. It is intended that the process will be reviewed again
in the upcoming year to ensure it remains effective.
Kim Taylor-Smith
C H A I R O F AU D I T A N D R I S K C O M M I T T E E
13 June 2022
84
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Directors’
Remuneration Report
“The Committee’s
primary objective is
to ensure that the
Group’s remuneration
policies and
practices support the
successful delivery
of the long-term
strategy.”
Members
• Mickola Wilson
• Kim Taylor-Smith
• Paula Dillon
• Steven Owen
Mickola Wilson
C H A I R O F R E M U N E R AT I O N C O M M I T T E E
KEY ACHIEVEMENTS
DURING 2021/22
AREAS OF FOCUS FOR
2022/2023
• Considered the operation of the
• Short term variable remuneration
annual bonus and grant of Long Term
Incentive Plan (LTIP) awards to ensure
they remain appropriate
• Continued to keep wider workforce
remuneration arrangements under
review including share plans and
overall levels of salary, bonus, pensions
and benefits
• Engagement with shareholders on
Remuneration matters.
including bonus and the achievement
of targets; and
• Longer term alignment of LTIPs for
senior staff only with appropriate
stretching objectives including for ESG
matters, and progress against these.
Dear Shareholder,
REMUNERATION POLICY
The Committee’s primary objective is to ensure that the Group’s
When setting the remuneration policy for the Executive Directors,
remuneration policies and practices support the successful delivery
the Committee considers the need to attract, retain and motivate
of the long-term strategy. This report sets out how the Committee
Executive Directors and senior management, whilst ensuring the
has fulfilled its objectives and details the remuneration outcomes
for the Executive Directors.
overall approach to remuneration supports the Group’s strategy
and is aligned with the interests of Shareholders.
COMMITTEE MEMBERSHIP AND MEETINGS
In accordance with the UK Code, members of the Committee are
The Directors’ Remuneration Policy was approved at the
Company’s AGM held in July 2021 and a summary of the policy
can be found on pages 89 to 92.
Independent Non-Executive Directors plus the Non-Executive
The Remuneration Policy is designed to be simple and transparent
Chairman. The Chief Executive may attend Committee meetings by
and is aligned to the Group’s strategic KPIs.
invitation. The Committee is supported by the Company Secretary.
Before putting to shareholders, the Committee undertook a
The Committee met twice during the year (details of attendance
review of the policy and considered whether any adjustments
are set out on page 74).
Advisors
The Company has been advised by MM&K during the
year ended 31 March 2022. MM&K Limited were paid
£5,940 (2021: £8,640) and do not have any other connection
with the Company.
were necessary and whether any alternative incentive structures
would work better. The Committee concluded that in the current
environment, the existing policy is appropriate and continues to
operate as intended. The Committee was particularly mindful
of the uncertainty and economic disruption caused by Covid-19
and considered that significant changes to the structure would
not be appropriate. Accordingly, the policy was only updated
to reflect best practice including the introduction of formal
85
GOVERNANCE Directors’
Remuneration Report C O N T I N U E D
guidance in relation to Directors’ minimum
Like the bonus, the Committee delayed
the Company will be increased up to ten
shareholdings and post-employment
the grant of awards under the Long Term
per cent with employees contributing five
requirements, as well as the introduction
Incentive Plan until after the half-year
per cent or more. There is no intention
of a formal discretionary override to the
results. Having seen some share price
currently to increase Directors' pensions
annual bonus and Long-Term Incentive
recovery during the first half of the year, on
to this level (currently a five per cent
Plan. The Committee will continue to keep
16 November 2021 awards were granted
contribution from the Company).
the policy under review.
PERFORMANCE OUTCOMES
FOR FY22
to the Executive Directors. The awards are
subject to the achievement of performance
criteria, which are linked to the Group’s
overall strategy, with 50% based on Total
Shareholder Return and 50% based on the
The 12 months to 31 March 2022 were
growth in the portfolio value using TPR
challenging. Covid-19 had a significant
(as calculated by MSCI), when measured
impact on our business and the businesses
against the TPR of the MSCI IPD Index
of all our tenants. Despite this, the Group
over a three-year performance period.
IMPLEMENTATION IN FY23
There will be salary increases for Directors
for the period commencing 1 April 2022
representing changes to the roles and
responsibilities of the CFO and there were
inflationary increases for the Executive
Property Director and Chief Executive.
Details are provided on page 98.
In line with Mr Sinclair stepping down from
the Board in June 2022, we will provide full
details of his leaving arrangements in the
2023 Remuneration Report.
achieved 98% rent collection, an adjusted
profit before tax ahead of budget as well
as seeing some share price recovery.
In light of the uncertainty that existed at
the time, the Committee delayed setting
the targets for the Directors’ annual bonus
for the year ending 31 March 2022 and
has disclosed these details in full on pages
93 and 94. A total of 50% of the maximum
potential target was achieved.
The Long Term Incentive awards that were
granted in November 2018 had a normal
vesting date of 1 November 2021. The
performance conditions related 50% to
Total Shareholder Return and 50% to Total
Property Return ('TPR') versus TPR of the
MSCI IPD index. The performance criteria
over a three-year period were achieved
for the portfolio valuation element and the
awards vested at 50%. Full details can be
found on page 94.
In accordance with the Remuneration
Policy, the maximum bonus opportunity
will be 100% of salary and the Committee
has set targets based on Profit Before
Tax ('PBT') and TPR growth and has
included ESG metrics for the Executive
Property Director and CFO (who also
has a metric for his additional Company
Secretary responsibilities). The Committee
ensures that individual metrics are
aligned to the business strategy and are
sufficiently stretching.
Awards under the Long-Term Incentive
Plan are typically made following the
publication of the Company’s full year
results and will be announced via a
regulated information service at the
relevant time. Performance will be based
on Total Property Return, Total Shareholder
Return and ESG metrics.
CONCLUDING REMARKS
The remuneration arrangements provide
In accordance with the UK Code, Directors’
alignment with shareholders through the
pension rates align to the rate applicable
use of financial and operational objectives.
to the majority of the workforce in the year.
The framework applies in a very similar
way across the Group in terms of types
of benefits and variable pay and the
new share plans and increased pension
provision for the workforce reflects
their importance to the Company and
valued contribution.
The Committee will take into consideration
a range of stakeholders’ interests when
making reward decisions for Directors,
especially those of our Shareholders.
On behalf of the Committee, I would
like to thank all our Shareholders for
their continued support. We believe
that the decisions taken with respect to
pay outcomes and the pay structures
going forwards are aligned with the
Group’s strategy, reflect the market
environment and are in the best interests
of Shareholders.
Mickola Wilson
C H A I R O F R E M U N E R AT I O N C O M M I T T E E
13 June 2022
After consultation with employees, we
will be looking at introducing a new
all employee share save plan ('SAYE')
details of which are in the notice
of 2022 Annual General Meeting.
Workforce pensions contributions from
86
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 87
GOVERNANCE Remuneration
at a glance
£7.8m
Adjusted PBT
21.1%
Total shareholder return
12.5%
Total property return
PERFORMANCE RELATED PAY FRAMEWORK (2022 AWARDS)
Annual Bonus
LTIP
35%
40%
40%
65%
40%
40%
20%
20%
Shares
Cash
Total Property Return compared to
TPR of the MSCI Index (40%)
ESG (20%)
Profit Before Tax (40%)
Total Property Return compared to
TPR of the MSCI Index (40%)
Total Shareholder Return (TSR) (40%)
ESG (20%)
88
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Remuneration
policy
This policy report sets out the Directors’ Remuneration Policy that guides
the Remuneration Committee’s decision-making which was approved at
the Company’s AGM on 29 July 2021, and is effective for a period of up to
three years from this date.
No significant changes were made compared to the previous policy and was updated to reflect best practice including the
introduction of formal guidance in relation to Directors’ minimum shareholdings and post-employment requirements, as well
as the introduction of a formal discretionary override to the annual bonus and Long-Term Incentive Plan.
EXECUTIVE DIRECTORS’ POLICY TABLE
ELEMENT AND LINK WITH
STRATEGY
Salary
Fixed amount at a level appropriate
to the skills and experience needed to
fulfil the role.
Annual bonus
To incentivise performance which is
measured against targets set at the
beginning of the financial year. Paying
part of the bonus in shares aligns the
interests of the directors with those
of shareholders.
OPERATION AND MAXIMUM POTENTIAL VALUE
PERFORMANCE
FRAMEWORK
Salaries are reviewed annually with effect from 1 April each
Salary is not linked to
year. Any increases are made having regard to inflation,
specific financial or non-
personal performance, and the need to retain and motivate.
financial performance
A review of the salaries in the Company’s peer group in
measures.
conjunction with the Group’s remuneration advisors may be
undertaken to ensure comparable salaries are being paid.
The Remuneration Committee seeks to ensure that salaries
are set at levels that are reasonable with an emphasis on
total remuneration being achieved from performance-based
rewards.
The Committee does not specify a maximum salary or
maximum salary increase.
Performance targets are set by the Remuneration Committee at
Performance is assessed
the beginning of each financial year. At the end of the financial
against a range of financial,
year the Committee reviews performance against the targets
non-financial and strategic
and also takes in to account the overall financial performance
targets which vary each
and future prospects.
year.
The maximum bonus opportunity is capped at 100% of salary.
The bonus is paid as to 65% in cash and 35% by way of an
option over shares pursuant to the Deferred Bonus Plan. The
ability to exercise the option granted under the Deferred Bonus
Plan is deferred for a year and there is a period of a further year
during which the options may be exercised. The Committee
has discretion for 100% to be paid in cash.
The Committee may, in exceptional circumstances, use its
discretion to amend the bonus outcome if it believes that
it does not properly reflect overall underlying business
performance, an individual’s contribution or some other factor.
Malus and clawback provisions apply to all elements of the
bonus. See page 91 for more detail.
89
GOVERNANCE Remuneration
policy C O N T I N U E D
ELEMENT AND LINK WITH
STRATEGY
LTIP
To incentivise and reward performance
over the long term, aligning directors’
interests with those of shareholders.
Pension
As part of their overall package
Executive Directors are provided with
retirement benefits.
Other Benefits
As part of their overall package
Executive Directors are provided with
a competitive level of benefits that
encourage well-being and engagement
OPERATION AND MAXIMUM POTENTIAL VALUE
PERFORMANCE
FRAMEWORK
Awards are proposed to be granted in the form of nil cost
Performance measures
options and will be subject to challenging performance
are aligned to the key
conditions in line with business KPIs, measured over a three-
objectives of the Company
year period.
Award levels are capped at a maximum value of 100% of salary.
and the creation of
shareholder value.
At the end of the three-year performance period a review is
The Committee reviews
undertaken and a comparison made with the performance
the measures, their relative
targets which will determine the percentage of the award that
weightings and targets
will vest.
Vested shares are subject to a further two-year holding period.
The Committee may, in exceptional circumstances, use its
discretion to adjust the level of vesting of LTIP awards if
it believes it does not properly reflect overall underlying
business performance, shareholders’ experience, an individual’s
contribution or any combination thereof.
Malus and clawback provisions apply to LTIPs.
prior to each award and
makes changes as is
deemed appropriate.
Executive Directors, below retirement age receive a
None
contribution in line with the rate applying to the majority of the
workforce of 5% of salary paid into a pension scheme.
Travel or car allowance – Travel allowances are fixed in the
None
Executive Directors service contracts.
Private medical cover - Private medical cover is at a level which
the Committee determines is fair and reasonable.
Life assurance - Life assurance is fixed at £1.5m for the
Executive Directors below retirement age.
Critical illness cover - The critical health insurance benefit for
the two Executive Directors below retirement age provides
£500,000 in the event policy cover terms are met.
Shareholding Requirements
The Chief Executive is expected to build up and retain a
None
Encourages long-term commitment and
alignment with shareholder interests.
minimum shareholding of 200% of basic salary. The other
Executive Directors are expected to build up and retain a
minimum shareholding of 100% of basic salary.
The shareholding will be built up over time, with a requirement
to retain 25% of any shares vesting under the Deferred Bonus
Plan or the Long-Term Incentive Plan (after tax/NI has been
settled) until the guideline is met.
Post-employment requirements - Any shares that are still
subject to the holding period as defined in the respective
award will need to be retained, and in all other regards the
Executive will be encouraged to engage with the Company
regarding the timing of any sales for a period of two years
following the termination of their employment to ensure
an orderly market is preserved. The Committee may, in
exceptional circumstances, exercise its discretion to adjust the
holding requirement.
90
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 DIVIDEND EQUIVALENTS FOR
SHARE-BASED AWARDS
HOW THE COMMITTEE WILL USE
ITS DISCRETION
Awards granted under the Deferred Bonus Plan and Long Term
The Committee may amend or substitute any performance
Incentive Plan incorporate the right to receive amounts equivalent
condition(s) if one or more events occur which cause it to
to any dividends or shareholder distributions which would have
determine that an amended or substituted performance condition
been paid between the date of grant and the date of the delivery
would be more appropriate, provided that any such amended or
of shares in respect of which an option has been exercised.
substituted performance condition would not be materially less
MALUS AND CLAWBACK
Where an option has been granted based on any incorrect
information including, without limitation, a material misstatement
in any published results of the Group, the number of shares
subject to the option shall be reduced or eliminated. In the event
that an option has already been exercised the Remuneration
Committee may decide that the recipient should make a
repayment of some or all of the benefit received. Malus and
clawback also applies to the cash element of the bonus and in the
circumstances described above a repayment of some or all of the
cash may be required.
difficult to satisfy than the original condition. The Committee
may adjust the calculation of performance targets and vesting
outcomes (for instance for material acquisitions, disposals or
investments and events not foreseen at the time the targets were
set) to ensure they remain a fair reflection of performance over the
relevant period. The Committee also retains discretion to make
downward or upward adjustments resulting from the application
of the performance measures if it considers that the outcomes
are not a fair and accurate reflection of business performance.
In the event that the Committee was to make an adjustment
of this sort, a full explanation would be provided in the next
Remuneration Report.
NON-EXECUTIVE DIRECTORS AND CHAIRMAN POLICY TABLE
ELEMENT AND LINK WITH
STRATEGY
Fees
OPERATION AND MAXIMUM POTENTIAL VALUE
PERFORMANCE
FRAMEWORK
Fees are normally reviewed every two years following the
Not applicable.
To provide competitive fees to attract
the right Non-Executives.
advice of the Company’s remuneration advisors.
Additional fees are payable for the chairing of
Board Committees.
No maximum is specified.
APPROACH TO RECRUITMENT REMUNERATION
The Company’s principle is that the remuneration of any new
Where an existing employee is promoted to the Board, the policy
recruit to the Board will be assessed in line with the same
would apply from the date of appointment to the Board and there
principles as for the Executive Directors, as set out in the
would be no retrospective application of the policy in relation
Policy Table.
The Committee is mindful that it wishes to avoid paying more than
it considers necessary to secure a preferred candidate with the
appropriate experience needed for a particular role.
In setting the remuneration for new recruits, the Committee will
have regard to guidelines and shareholder sentiment regarding
one-off or enhanced short-term or long-term incentive payments
as well as giving consideration for the appropriateness of any
performance measures associated with an award.
to subsisting incentive awards or remuneration arrangements.
Accordingly, the existing remuneration package would be
honoured and form part of the ongoing remuneration of the
person concerned. These would be disclosed to shareholders in
the Remuneration Committee report for the relevant financial year.
New Non-Executive Directors will be appointed through letters
of appointment and fees set at a competitive market level and
in line with the other existing Non-Executive Director. Letters of
appointment are normally for an initial term of three years.
91
GOVERNANCE Remuneration
policy C O N T I N U E D
SERVICE CONTRACTS AND POLICY ON PAYMENTS FOR LOSS OF OFFICE
The Committee’s policy on service contracts for Executive Directors is that they should provide for termination of employment by giving
12 months’ notice.
ELEMENT
OPERATION
Salary
Service contracts may be terminated immediately by making a payment in lieu of notice. An immediate payment
of 50% of salary will be made followed by monthly payments after six months in the event that alternative
employment has not been secured.
Annual Bonus
In the event of termination for a reason other than resignation or gross misconduct for material performance
or conduct concerns, a Director may be eligible, at the discretion of the Remuneration Committee to receive
an award based on the achievement of the performance targets. If the Director has not been employed
throughout the year a reduced pro-rata amount may be paid in specific circumstances or at the discretion of the
Remuneration Committee.
Deferred Bonus
Plan
In relation to Deferred Bonus awards, individuals would be defined as good or bad leavers, with good leavers
being those leaving under pre-determined circumstances such as retirement, redundancy, ill-health, death or
disability (proved to the satisfaction of the Committee), or those deemed by the Committee in its absolute
discretion to be good leavers given the circumstances surrounding termination. All other leavers would be
bad leavers.
If an individual is categorised as a good leaver the award will vest on the normal vesting date unless the
Committee determines the award should vest following cessation of employment or a change of control. If an
individual is considered by the Committee to be a bad leaver, their awards will lapse in full.
LTIP
Individuals would be defined as good or bad leavers, with good leavers being those leaving under pre-
determined circumstances such as retirement, redundancy, ill-health, death or disability (proved to the
satisfaction of the Board), or those deemed by the Committee in its absolute discretion to be good leavers given
the circumstances surrounding termination. All other leavers would be bad leavers. If an individual is categorised
as a good leaver then, other than in exceptional circumstances, the award will vest on the normal vesting date
reflecting the extent to which performance targets have been met and the number of shares would normally
be pro rated to reflect the reduced service period. The post vest holding period would also apply, other than in
exceptional circumstances. If an individual is determined to be a bad leaver, their awards will lapse in full.
STATEMENT OF CONSIDERATION OF
EMPLOYMENT CONDITIONS ELSEWHERE IN
THE COMPANY
Remuneration throughout the Group is considered when setting
the directors’ remuneration policy. Benefits for employees are
similar to those provided to the Executive Directors. Individual
salaries, awards of bonuses and LTIPs will vary according to the
employees’ level of responsibility.
STATEMENT OF CONSIDERATION OF
SHAREHOLDER VIEWS
DECISION MAKING PROCESS FOR
DETERMINATION, REVIEW AND
IMPLEMENTATION OF DIRECTORS’
REMUNERATION POLICY
The Committee keeps the operation of the policy under regular
review to ensure it continues to operate as intended and support
the Group’s strategy over the longer term. The Committee will
review the structure and quantum and consider the UK Corporate
Governance Code 2018, market practice, institutional investor and
investor representative body views generally as well as those of
its own shareholders. The Committee will also have regard to the
remuneration arrangements, policies and practices of the wider
The Committee takes into account the published remuneration
workforce. If the Committee determines that changes are required,
guidelines and specific views of Shareholders and proxy voting
it will engage with its largest shareholders to ensure their feedback
agencies when considering the operation of the Remuneration
is taken into consideration when finalising any Policy changes.
Policy. Where appropriate, the Committee will consult with
the Company’s larger Shareholders regarding changes to the
operation of the Policy. The Committee will consider specific
concerns or matters raised at any time by Shareholders.
The Committee manages conflicts of interest by ensuring that
the relevant member of management or the Committee are not
present when their own remuneration is determined or discussed.
The Committee will receive input from the Chief Financial Officer
on remuneration related matters. The Company Secretary acts
as Secretary to the Committee. None are present when their
own remuneration is determined. In addition, the Committee is
satisfied that the advice received by MM&K in relation to executive
remuneration matters is objective and independent.
92
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Annual Remuneration
Report
This report was prepared by the Remuneration Committee and approved by the Board for the
financial year ended 31 March 2022.
DIRECTORS’ TOTAL REMUNERATION (AUDITED)
The table below sets out the total remuneration receivable by each of the Directors who held office during the year to 31 March 2022,
with a comparison to the previous financial year.
Executive
Directors
Neil Sinclair
Richard Starr
Salary
£
Taxable
benefits
£
Bonus
Cash
£
Year
Bonus
Shares
£
Long term
incentive
plan
£
Pension
£
Total fixed
pay
£
Total
variable
pay
£
Total pay
£
2022 303,000
17,773
98,475
53,025
118,402
–
320,773
269,902
590,675
2021
303,000
2022 229,500
2021
Matthew Simpson1 2022
218,025
61,973
Stephen Silvester2
2021
–
2022 176,425
15,340
8,525
7,594
3,628
–
1,747
69,326
74,588
52,510
52,000
37,330
40,163
28,274
28,000
–
–
–
–
Total
2021
2022
2021
225,000
770,898
2,076
50,908
31,673 225,063
27,412
121,188
743,525
25,010
172,744
93,016
–
–
89,314
–
11,475
318,340
249,500
106,656
204,065
424,996
453,565
–
–
–
74,775
–
282,491
24,534
3,122
–
6,490
11,125
21,087
35,659
250,133
68,723
–
184,662
235,701
823,658
80,784
80,000
330,937
148,723
–
74,775
–
259,437
78,320
314,021
628,741 1,452,400
804,194
265,760
1,069,954
1 Matthew Simpson was appointed CFO on 11 November 2021.
2 Stephen Silvester left the Board on 29 October 2021. After leaving, Mr Silvester was paid £45,967 in lieu of notice period, £261 in taxable benefits and
£4,635 in pension benefit
Non-Executive Directors
Steven Owen1
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Stanley Davis2
Anthony Dove3
1 Steven Owen was appointed Chairman on 1 January 2022
2 Stanley Davis retired as Chairman on 31 December 2021
3 Anthony Dove retired from the Board on 7 August 2020
ANNUAL BONUS
Fees to 31
March 2022
£
Fees to 31
March 2021
£
27,500
45,000
45,000
40,000
37,500
–
195,000
–
45,000
45,000
40,000
50,000
15,865
195,865
The Group’s remuneration policy for the year ended 31 March 2022 caps bonus payments to the Executive Directors at 100% of salary.
In determining the bonuses, the Executive Directors are measured against specific criteria. Bonuses are awarded depending on whether
performance achieves the relevant target criterion.
For the year ended 31 March 2022, the specific criteria comprised Total Property Return compared to the MSCI IPD Index (50%), and
profit (adjusted PBT and profits from Hudson Quarter) (50%) being key deliverables in the year. The assessment of actual performance
achieved is set out below and on the next page.
For the purposes of determining the Total Property Return portion, MSCI, the global provider of market indexes, was provided with the
values of the Company’s properties as at 1 April 2021 based on the Cushman & Wakefield valuations as at that date. MSCI measured the
increase in value as at 30 September 2021 and again on 31 March 2022 using the Cushman & Wakefield valuations as at those dates and
then compared them with the MSCI IPD index. The Company’s properties showed an increase as at 31 March 2022 on a total return basis
of 12.5% compared with the MSCI IPD Index, which showed a total return of 19.6%. The total return achieved by the Company did not
exceed the benchmark index and therefore this portion of the bonus was not met.
Adjusted Profit Before Tax comprised 50% of the potential bonus. In the year ended 31 March 2022 the Group generated recurring
earnings of £7.8m which met the threshold.
The remaining bonus criteria comprised specific strategic targets for progress at Hudson Quarter, York which was achieved in full.
Based on the performance criteria, the Executive Directors achieved 50% of the maximum award.
93
GOVERNANCE Annual Remuneration
Report C O N T I N U E D
The Palace Capital Deferred Bonus Plan provides that 35% of any bonuses awarded are deferred for a year and shares to the value of the
deferred bonus amount allocated. The Executives will have a further year from the vesting date to exercise their options. In respect of the
year ended 31 March 2022, 35% will be deferred in accordance with the terms of the Deferred Bonus Plan.
ANNUAL BONUS TARGETS FOR YEAR ENDED 31 MARCH 2022 AND OUTCOMES
Measure
Weighting
Target
Increase in Total Property Return
Profit
IFRS profit before tax
excluding revaluation
movements and gains/
losses on disposals but
adding back profit on
HQ residential sales
50%
50%
Outperform MSCI Index by 1–3%
Base Case Budget £6.3m + £3.8m =
£10.1m, Best Case Budget £7.5m +
£4.6m = £12.1m) Planned profit from HQ,
in range of £3m to £4.5m Targets: £10.5m
= 0%, £11.5m = 50% Measured on a
sliding scale (approximately every extra
£0.2m of profit above £10.5m will equate
to a further 10% of bonus)
Achievement
(7.1)%
£11.6m
Awarded (% of
maximum)
0%
50%
Total
100%
50.0%
LONG-TERM INCENTIVE PLAN
Executives have been able to participate in the Group’s Long Term Incentive Plan. The scheme is designed to encourage the matching of
interests between management and Shareholders. Further details are provided in note 22 of the Group financial statements.
The LTIP awards that were granted in July 2018 had a normal vesting date of 12 July 2021. The performance criteria over a three-year
period were achieved for the total property return so 50% vested. The remainder lapsed.
Measure
Performance condition
Threshold
Maximum
Actual
Weighting
Awarded (%
of maximum)
Total Shareholder
Return
Annualised and Total TSR over the
performance period. 33.33% vests
for achieving threshold performance
increasing on a straight-line basis to
full vesting.
TPR
50% based on increase in Total Property
return as compared with an MSCI IPD
index. For every whole % point of
excess performance by the Company,
16.66% of the award will be awarded,
up to a maximum of 50%.
Annualised
TSR 8.0%
Annualised
TSR 13.0%
Below
Threshold
50%
0%
Total
TSR 26.0%
Total
TSR 44.3%
Median Upper Quartile
Above
benchmark
50%
50%
SCHEME INTERESTS AWARDED DURING THE YEAR
The following awards under the Long-Term Incentive Plan were granted to the Executive Directors on 12 July 2021:
Neil Sinclair
Richard Starr
Matthew Simpson
Number of
shares
% of salary
Face value of
award1
Performance
period end
Threshold
vesting
122,821
93,028
64,856
100
100
100
£303,000 31 March 2024
31 March 2024
£229,500
31 March 2024
£160,000
20%
20%
20%
1 Face value calculated based on the mid-market closing average price for the five days ending 12 July 2021 of 246.7 pence.
The awards are subject to the achievement of performance criteria over a three-year period based on Total Shareholder Return (50%) and
the growth in the portfolio value using Total Property Return compared against the MSCI IPD Index (50%).
94
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 OUTSTANDING SCHEME INTERESTS
The Executive Directors have the following outstanding awards under the Long-term Incentive Plan:
As at
31 March
2022
Share price at
date of award
At
31 March
2021
Granted
Vested and
exercised
Neil Sinclair
Total
Richard Starr
Total
Matthew Simpson
80,282
99,494
159,264
–
60,563
75,211
120,631
–
–
17,8751
30,2231
–
–
122,821
–
–
–
93,028
–
–
Total
–
64,856
40,140
–
–
–
30,281
–
–
–
–
–
–
Lapsed
40,142
–
–
–
30,282
–
–
–
–
–
–
–
99,494
159,264
122,821
381,579
–
75,211
120,631
93,028
288,870
17,875
30,223
64,856
112,954
Grant date Vesting date
13/07/2018
25/06/2019
14/10/2020
16/11/2021
13/07/2021
25/06/2022
14/10/2023
16/11/2024
13/07/2018
25/06/2019
14/10/2020
13/07/2021
25/06/2022
14/10/2023
16/11/2021
16/11/2024
£3.55
£2.96
£1.90
£2.47
£3.55
£2.96
£1.90
£2.47
£2.96
£1.90
£2.47
25/06/2019
25/06/2022
14/10/2020
14/10/2023
16/11/2021
16/11/2024
Awards granted from 2018 onwards are subject to a two-year holding period following vesting.
1 Mr Simpson's LTIP awards prior to joining the Board were based on 50% of salary
2 The awards to Mr Silvester lapsed on his leaving the Company in October 2021
DEFERRED BONUS PLAN
The Palace Capital Deferred Bonus Plan provides that 35% of any bonuses awarded may be deferred for a year and options over shares
to the value of the deferred bonus amount allocated plus dividends accruing at the discretion of the Remuneration Committee. The
Executive Directors will have a further year from the vesting date to exercise their options. The Deferred Bonus Plan awards do not
have any performance criteria attached to them. In respect of the year ended 31 March 2022, 35% of the bonuses due to the Executive
Directors were deferred and the details of the outstanding awards are as follows:
Neil Sinclair
At 31
March 2021
34,417
Richard Starr
26,017
Vested and
exercised
34,417
26,017
Granted
14,755
11,175
Lapsed
–
–
As at
31 March
2022
Share price
at date of
award
–
14,755
–
11,175
£1.86
£2.53
£1.86
£2.53
Grant date Vesting date
14/07/2020
14/07/2021
15/06/2021
14/07/2020
15/06/2021
15/06/2022
14/07/2021
15/06/2022
1 Dividend equivalents of 2,074 and 1,566 were provided to Mr Sinclair and Mr Starr respectively on exercise of their Deferred Bonus Plan Awards.
2 Mr Silvester received 25,975 shares including dividend equivalents. He was also awarded 10,835 shares in June 2021 for his Deferred Bonus Plan which
will vest in June 2022.
3 Mr Simpson did not receive a Deferred Bonus Award in the year ended 31 March 2022.
TOTAL PENSION ENTITLEMENTS
The Company makes pension contributions into a defined contribution scheme on behalf of Directors below retirement age. For the year
ending 31 March 2022, in line with the Remuneration Policy, contributions were paid at a rate of 5% of basic salary.
PAYMENTS TO PAST DIRECTORS
There were no payments to past Directors in the year ended 31 March 2022 except as disclosed for Mr Silvester.
95
GOVERNANCE Annual Remuneration
Report C O N T I N U E D
PAYMENTS FOR LOSS OF OFFICE
There were no payments for loss of office in the year ended 31 March 2022.
STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS
Directors’ interests in the shares of the Company, including family interests, were as follows:
Steven Owen
Neil Sinclair
Richard Starr
Matthew Simpson1
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Ordinary shares of 10p
each 31 March 2022
Ordinary shares of 10p
each 31 March 2021
Outstanding Ordinary
share options of 10p
each 31 March 2022
Outstanding Ordinary
share options of 10p
each 31 March 2021
–
306,425
232,831
7,060
10,000
10,000
10,000
–
260,715
199,575
–
10,000
10,000
10,000
–
396,334
300,045
112,954
–
–
–
–
373,457
262,981
–
–
–
–
As at 13 June 2022 there was no change in Directors' shareholding.
1 Matthew Simpson was appointed to the Board on 11 November 2021
REVIEW OF PAST PERFORMANCE
The following graph shows the Group’s Total Shareholder Return (TSR) for the period to 31 March 2022 as compared with the FTSE All
Share Index. The Committee has chosen the FTSE All Share Index as the Company’s shares are a constituent of this index and it will
provide a baseline for future years. Total Shareholder Return measures share price growth with dividends deemed to be reinvested on the
ex-dividend date.
500p
400p
300p
200p
100p
0
31/03/2013
31/03/2014
31/03/2015
31/03/2016
31/03/2017
31/03/2018
31/03/2019
31/03/2020
31/03/2021
31/03/2022
Palace Capital PLC
FTSE All Share Index
PERCENTAGE CHANGES IN CHIEF EXECUTIVE’S REMUNERATION
The percentage change in the Chief Executive’s remuneration received from the previous year (2020) compared with the average change
in remuneration for all other employees is as follows:
Chief Executive
Other employees (excl. Chief Executive and other directors)
Salary
0.0%
4.0%
Taxable
benefit Annual bonus
15.9%
0.0%
42.0%
40.2%
96
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022
HISTORICAL CHIEF EXECUTIVE’S REMUNERATION
Year to 31 March
Total remuneration
£
Annual bonus (as a % of the
maximum payout)
LTIP vesting (as a % of the
maximum possible)
2022
2021
2020
2019
2018
2017
2016
2015
20141
590,675
424,996
598,406
479,432
683,379
412,975
362,629
262,007
125,467
50
35.2
62
40
95
63
2
2
2
–
–
50.00
32.75
16.66
–
–
–
–
1 Fourteen month period ended 31 March 2014
2 No policy for annual bonuses in place
RELATIVE IMPORTANCE OF SPEND ON PAY
The table below shows the expenditure and percentage change in employee remuneration as compared with dividends paid to
Shareholders (see note 4 to the financial statements):
Employee costs
Dividends
Percentage Change in Directors’ Remuneration in the year
Neil Sinclair
Richard Starr
Matthew Simpson1
Steven Owen2
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Total Directors change (%)
Average change for employees (%)
2022
£
2021
£
2,895,000
5,426,862
2,642,016
3,455,227
% change
9.6%
57.1%
Salary
Benefits
Bonus
0%
0%
0%
0%
0%
0%
0%
0%
4%
16%
12%
N/A
N/A
N/A
N/A
N/A
15%
0%
42%
42%
N/A
N/A
N/A
N/A
N/A
42%
40%
1 Matthew Simpson was appointed Chief Financial Officer and became a Director on 11 November 2021 and his salary on appointment was £160,000
2 Steven Owen was appointed Chairman on 1 January 2022 at a fee of £110,000
Percentage change in directors remuneration in prior year
Neil Sinclair
Stephen Silvester
Richard Starr
Stanley Davis
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Total Directors change (%)
Average change for employees (%)
Salary
Benefits
Bonus
3%
6%
3%
0%
0%
0%
0%
4%
10%
(5)%
(77)%
(10)%
N/A
N/A
N/A
N/A
26%
N/A
(42)%
(40)%
(42)%
N/A
N/A
N/A
N/A
41%
9%
97
GOVERNANCE
Annual Remuneration
Report C O N T I N U E D
SERVICE CONTRACTS AND LETTERS OF APPOINTMENT
The Committee’s policy on service contracts for Executive Directors is that they should provide for termination of employment by giving
no more than 12 months’ notice.
NAME
DATE OF
APPOINTMENT
ORIGINAL
CONTRACT
DATE
CURRENT
CONTRACT
DATE
NOTICE
PERIOD
TERMINATION
ARRANGEMENTS
Neil
Sinclair
Matthew
Simpson
Richard
Starr
30 July 2010
8 September
15 February 2018
12 months
An immediate payment of 50%
2011
of salary followed by monthly
payments after six months in the
event that alternative employment
has not been secured.
11 November 2021
18 January 2016
11 November
12 months
An immediate payment of 50%
2021
of salary followed by monthly
payments after six months in the
event that alternative employment
has not been secured.
21 October 2013
24 September
20 February 2018
12 months
An immediate payment of 50%
2013
of salary followed by monthly
payments after six months in the
event that alternative employment
has not been secured.
Chairman and Non-Executive Directors
The Non-Executive Directors are engaged for fixed terms, typically three years, which may be extended for subsequent periods.
The effective dates of the letters of appointment for the current Non-Executive Directors are as follows:
Name
Steven Owen
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Date of letter for
current appointment
Date term due to expire
1 January 2022
6 October 2020
31 January 2022
30 January 2020
31 December 2024
5 October 2023
30 January 2025
28 February 2023
IMPLEMENTATION OF REMUNERATION POLICY IN 2022/23
In respect of the year ending 31 March 2023, the Committee intends to implement the Executive and Non-Executive Director
remuneration policies as follows:
Salary
EXECUTIVE DIRECTORS
The average salary increase across the workforce from 1 April 2022 was 11.1% of salary.
Neil Sinclair1
Matthew Simpson
Richard Starr
3 Mr Sinclair stepped down from the Board with effect from 14 June 2022
Salary
315,000
238,000
238,000
Change
4.0%
48.8%
3.7%
98
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 NON-EXECUTIVE DIRECTORS
Non-Executive Director fees for the year ending 31 March 2023 are unchanged and will be as follows:
Role
Steven Owen1
Kim Taylor-Smith
Non-Executive Chairman
Non-Executive Director
Mickola Wilson
• Chair of Audit and Risk Committee
Non-Executive Director
Paula Dillon
• Chair of Remuneration Committee from 7 August 2020
• Chair of the Nominations Committee
• Senior Independent Director from 1 April 2020
Non-Executive Director
• Chair of ESG Committee from 1 April 2020
2023 fee
110,000
45,000
45,000
40,000
Change
–
0%
0%
0%
4 The fee for Mr Owen for his role as Interim Executive Chairman is under discussion with the Remuneration Committee and will be disclosed in the 2023
Annual Report and Accounts
PENSION AND BENEFITS
The Company will make pension contributions into a defined contribution scheme on behalf of Directors at a rate of 5% of basic salary,
and will continue to make provision for other health benefits and cash alternatives as set out in the Remuneration Policy.
ANNUAL BONUS
The 2022/23 bonus is capped at 100% of salary. The performance metrics are based on: 40% total property performance against MSCI
benchmark; 40% adjusted profit before tax over one year and 20% based on ESG metrics.
LONG-TERM INCENTIVE PLAN
Awards under the Long-Term Incentive Plan are typically made following the publication of the Company’s full year results, it is proposed
that the performance outcome will be based on total property return against an MSCI benchmark (40%), total shareholder return (40%)
and ESG metrics (20%).
STATEMENT OF VOTING AT ANNUAL GENERAL MEETING
The table below sets out the results of the voting in respect of the Directors’ Remuneration Report at the 2021 AGM and Remuneration
Policy at the same AGM.
Remuneration Report
Remuneration Policy
Percentage of votes cast
Number of votes cast
For and
discretion
92.83%
84.50%
Against
For and
discretion
Against
Withheld1
7.17%
30,812,882
2,380,320
15.50%
28,048,824
5,144,377
207,936
207,937
1 A vote withheld is not a vote in law and is not included in the calculation of the number or the percentage of votes For or Against the resolution
APPROVAL
This report was approved by the Board of Directors on 13 June 2022 and signed on its behalf by:
Mickola Wilson
C H A I R O F R E M U N E R AT I O N C O M M I T T E E
99
GOVERNANCE Directors’ Report and
additional disclosures
The Directors present their report
and the audited consolidated financial
statements of Palace Capital plc for the
year ended 31 March 2022.
STATUTORY INFORMATION CONTAINED
ELSEWHERE IN THE ANNUAL REPORT
Information required to be part of this Directors’ Report can be
found elsewhere in the Annual Report and is incorporated into this
report by reference, as indicated in the relevant section.
In accordance with the UK Financial Conduct Authority’s Listing
Rules LR 9.8.4c, the information to be included within the Annual
Report, where applicable, is set out in the Directors’ Report on the
following pages:
•
•
•
Strategic report pages 1 to 63
Financial Review pages 32 to 35
Risk Management pages 36 to 43
• Going Concern & Viability page 38
•
•
•
•
Section 172 Statement pages 44 and 45
Remuneration Report pages 87 to 99
Financial instruments page 136
Related party transactions page 144
RESULTS AND DIVIDENDS
The results for the year are set out in the financial statements. The
Company paid interim dividends of 3.00p per Ordinary share on
15 October 2021, 3.25p per Ordinary share on 9 December 2021
and 3.25p per Ordinary share on 14 April 2022. The Directors
recommend the payment of a final dividend in respect of the year
ended 31 March 2022 of 3.75p per Ordinary share to be paid on 5
August 2022 to the Shareholders on the register on 1 July 2022.
DIRECTORS
The Directors’ powers, including the rules relating to the
appointment and replacement of Directors, are conferred on them
by UK legislation and by the Company’s Articles of Association.
Changes to the Articles of Association are only permitted in
accordance with legislation and must be approved by a special
resolution of Shareholders.
Details of the Directors of the Company who served during the
year ended 31 March 2022 and up to the date of the financial
statements, are set out on pages 68 and 69, and their interests in
the Ordinary share capital of the Company and details of options
granted under the Group’s share schemes are set out in the
Annual Remuneration Report on pages 87 to 99. The interests
of the Directors in the shares in the Company have not changed
since the end of the financial year to 13 June 2022, the latest
practicable date. No member of the Board had a material interest
in any contract of significance with the Company, or any of its
subsidiaries, at any time during the year.
In accordance with the UK Code, all Directors offer themselves
for re-election at the AGM on 29 July 2022. The Directors’ service
contract terms are set out in the Annual Remuneration Report on
page 98.
POLITICAL DONATIONS
During the year, no donations were made to political parties and
none are proposed for the current year.
SHARE CAPITAL
The present capital structure of the Company is set out in note 21
to the financial statements.
POST BALANCE SHEET EVENTS
Details of post balance sheet events are provided in note 25 on
page 144 of the financial statements.
PURCHASE OF OWN SHARES BY THE
COMPANY
At the Annual General Meeting of the Company, held on 29 July
2021, authority was granted to the Directors to purchase, in the
market, the Company’s own shares, up to the limit of 10% of the
issued share capital. The authority was expressed to run until the
conclusion of the next Annual General Meeting of the Company.
No share purchases were made pursuant to this authority during
FUTURE DEVELOPMENTS
Details of future developments are provided in the Strategic
Report on page 6.
GOING CONCERN
The Directors confirm they have a reasonable expectation that the
Company and the Group have adequate resources to continue in
operation for at least 12 months from the date of approval of the
the year. Renewal of this authority will be proposed at the
financial statements.
forthcoming Annual General Meeting.
100
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 SUBSTANTIAL SHAREHOLDINGS
The table below is provided by our brokers under the requests
made to shareholders under section 793 of the Companies Act
2006 and information provided to the Company. As such this
information is regarded by the Company as providing an up to
date representation of our major shareholders’ interests:
As at 13 June 2022
Peter Gyllenhammar AB
Winton Capital Management
JO Hambro Capital Management
AXA Investment Managers
Premier Fund Managers
Allianz Global Investor
Mr Mark Harrison
M&G Investment Management
Charles Stanley & Co
Stanley Davis
As at 31 March 2022
AXA Investment Managers UK
Winton Capital Management
Peter Gyllenhammar AB
JO Hambro Capital Management
Premier Fund Managers
Allianz Global Investors GmbH
Mr Mark Harrison
M&G Investment Management
Charles Stanley & Co
Davis S H Esq
Hargreaves Lansdown Stockbrokers
Ordinary 10p
shares No.
Shareholding
%
4,278,227
3,700,000
3,370,217
3,196,495
3,080,808
2,716,973
2,344,153
1,900,830
1,706,057
1,665,287
9.24
7.99
7.28
6.91
6.66
5.87
5.06
4.11
3.69
3.60
Ordinary 10p
shares No.
Shareholding
%
3,257,633
3,700,000
4,278,227
3,370,217
3,080,808
2,716,973
2,344,153
1,900,830
1,721,684
1,665,287
1,636,568
8.38%
7.99%
7.59%
7.28%
6.66%
5.87%
5.06%
4.11%
3.71%
3.60%
3.51%
AUTHORISATION OF CONFLICTS
OF INTEREST
Under the Articles of Association of the Company and in accordance
with the provisions of the Companies Act 2006, a Director must avoid
a situation where they have, or can have, a direct or indirect interest
that conflicts, or possibly may conflict with the Company’s interests.
However, the Directors may authorise conflicts and potential conflicts,
as they deem appropriate. As a safeguard, only Directors who have
no interest in the matter being considered will be able to make the
relevant decision, and the Directors will be able to impose limits or
conditions when giving authorisation if they think this is appropriate.
During the financial year ended 31 March 2022, the Directors
authorised a potential conflict in relation to Mickola Wilson’s
appointment as a Non-Executive director of Mailbox REIT plc.
CHANGE OF CONTROL
The Group has in place a number of agreements with its lending
banks, which contain certain termination rights that would have
an effect on a change of control. In addition, the Group’s share
schemes contain provisions that, in the event of a change of
control, would result in outstanding options and awards becoming
exercisable, subject to the rules of the relevant schemes. The
Directors service contracts contain a provision for the payment of
compensation for loss of office or employment that occurs directly
as a result of a takeover bid.
GREENHOUSE GAS EMISSIONS
The Group’s GHG emission report can be found on page 49.
AUDITOR
DIRECTORS’ INDEMNITIES AND DIRECTORS’
AND OFFICERS’ LIABILITY INSURANCE
The Company’s agreement to indemnify each Director against
any liability incurred in the course of their office to the extent
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware, there
is no relevant Audit information of which the Company’s Auditor
is unaware; and each Director has taken all the steps that they
ought to have taken as a Director to make themselves aware of
permitted by law remains in force. The Group maintains Directors’
any relevant audit information and to establish that the Company’s
and Officers’ Liability Insurance.
Auditor is aware of that information.
FINANCIAL RISK MANAGEMENT
The Auditor, BDO LLP, has indicated their willingness to continue in
office. The Board, on the advice of the Audit and Risk Committee,
The Group is exposed to market risk (including interest rate risk
recommends their re-appointment at the Annual General Meeting.
and real estate market risk), credit risk and liquidity risk. The
Group’s senior management oversee the management of these
risks, and the Board of Directors has overall responsibility for
the determination of the Group’s risk management objectives
and policies, and it sets policies that seek to reduce risk as far as
2022 ANNUAL GENERAL MEETING
The 2022 AGM will be held on Friday 29 July 2022 at 10.00 a.m.
The resolutions are set out in the Notice of Meeting, together with
possible without unduly affecting the Group’s competitiveness and
explanatory notes.
flexibility. Further details regarding these policies are set out in
note 26 and the Risk Management section of the Annual Report
and Accounts.
This report was approved by the Board and signed on its behalf.
Phil Higgins
C O M PA N Y S EC R E TA RY
Palace Capital plc Incorporated, registered and domiciled in
England and Wales number 5332938 4th Floor, 25 Bury Street
London SW1Y 6AL
101
GOVERNANCE Statement of
Directors’ Responsibilities
The Directors are responsible for
preparing the Annual Report and
the Group and Company financial
statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare Group and
The Directors are responsible for keeping adequate accounting
Company financial statements for each financial year. Under that
records that are sufficient to show and explain the Company’s
law, the Directors have prepared the Group financial statements
transactions and disclose with reasonable accuracy at any time
in accordance with International Financial Reporting Standards
the financial position of the Company and enable them to ensure
(IFRSs) as adopted pursuant to Regulation (EC) No 1606/2002 as
that the financial statements comply with the requirements of
it applies to the European Union, and have elected to prepare the
the Companies Act 2006 and, as regards the Group Financial
Company financial statements in accordance with United Kingdom
Statements, Article 4 of the IAS Regulations.
Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law).
They are also responsible for safeguarding the assets of the Group
and hence for taking reasonable steps for the prevention and
Under company law the Directors must not approve the financial
detection of fraud and other irregularities.
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and of
the profit or loss of the Group and the Company for the period.
In preparing each of the Group and Company financial statements
the Directors are required to:
•
select suitable accounting policies and then apply
them consistently;
The Directors are responsible for ensuring the Annual Report and
the financial statements are made available on a website. Financial
statements are published on the Company’s website in accordance
with legislation in the United Kingdom governing the preparation
and dissemination of financial statements, which may vary from
legislation in other jurisdictions. The maintenance and integrity of
the Company’s website is the responsibility of the Directors. The
• make judgements and estimates that are reasonable
Directors’ responsibility also extends to the ongoing integrity of
and prudent;
the financial statements contained therein.
•
•
for the Group financial statements, state whether they
have been prepared in accordance with international
accounting standards in conformity with the requirements
of the Companies Act 2006 and international financial
reporting standards adopted pursuant to Regulation (EC)
No 1606/2002 as it applies to the European Union, subject
to any material departures disclosed and explained in the
financial statements;
for the Company financial statements, state whether they
have been prepared in accordance with UK GAAP, subject to
any material departure disclosed and explained in the parent
company financial statements;
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent Company will continue in business; and
• under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that complies with that law and those regulations.
DIRECTORS’ RESPONSIBILITIES
STATEMENT
The Directors confirm to the best of their knowledge:
•
•
•
the financial statements have been prepared in accordance
with international accounting standards in conformity with
the requirements of the Companies Act 2006, international
financial reporting standards adopted pursuant to Regulation
(EC) No 1606/2002 as it applies in the European Union and
Article 4 of the IAS Regulation, and give a true and fair view of
the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
as a whole;
the Strategic Report includes a fair review of the development
and performance of the business and the financial position
of the Company and the undertakings included in the
consolidation as a whole, together with a description of the
principal risks and uncertainties that they face; and
the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information
necessary for Shareholders to assess the Group’s and
Company’s performance, business model and strategy.
On behalf of the Board
Phil Higgins
C O M PA N Y S EC R E TA RY
102
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Independent Auditor’s Report
to the members of Palace Capital plc
OPINION ON THE FINANCIAL STATEMENTS
In our opinion:
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 March 2022
and of the Group’s profit for the year then ended;
the Group financial statements have been properly prepared in accordance with UK adopted international accounting standards;
the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice; and
•
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Palace Capital plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year
ended 31 March 2022 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial
Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company Statement of
Financial Position, the Company Statement of Changes in Equity and notes to the financial statements, including a summary of significant
accounting policies.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
UK adopted international accounting standards. The financial reporting framework that has been applied in the preparation of the
Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting
Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted
Accounting Practice).
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit opinion is
consistent with the additional report to the Audit Committee.
Independence
Following the recommendation of the audit committee, we were appointed by the Board of Directors on 1 April 2015 to audit the
financial statements for the year ending 31 March 2015 and subsequent financial periods. The period of total uninterrupted engagement
including retenders and reappointments is eight years, covering the years ending 31 March 2015 to 31 March 2022. We remain
independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements. The non-audit services prohibited by that standard were not
provided to the Group or the Parent Company.
CONCLUSIONS RELATING TO GOING CONCERN
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our evaluation of the Directors’ assessment of the Group and the Parent
Company’s ability to continue to adopt the going concern basis of accounting is included in the Key audit matters section of our report:
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually
or collectively, may cast significant doubt on the Group and the Parent Company’s ability to continue as a going concern for a period of
at least twelve months from when the financial statements are authorised for issue.
In relation to the Parent Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to
add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of
this report.
103
GOVERNANCE Independent Auditor’s Report
to the members of Palace Capital plc C O N T I N U E D
OVERVIEW
Coverage
100% (2021: 100%) of Group revenue
100% (2021: 100%) of Group investment property
99.9% (2021: 99.9%) of Group total assets
99.9% (2021: 99.9%) of Group profit before tax
Key audit matters
2022
2021
KAM 1
KAM 2
KAM 3
Valuation of property portfolio
Valuation of property portfolio
Revenue recognition
Revenue recognition
Going concern and loan
Going concern and loan
covenants
covenants
Materiality
Group financial statements as a whole
We determined materiality for the Group financial statements as a whole to be £2.9m (2021: £3m),
which was set at 1% of Group total assets (2021: 1%).
AN OVERVIEW OF THE SCOPE OF OUR AUDIT
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal
control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override
of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material
misstatement.
The Group operates solely in the United Kingdom. In addition to the Parent Company, we identified three significant components, being;
• Palace Capital (Developments) Limited
• Palace Capital (Signal) Limited
• Property Investment Holdings Limited
Full scope audits were performed by the Group audit team on all significant components and the Parent Company.
The non-significant components were subject to analytical procedures by the Group audit team.
104
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and
directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
KEY AUDIT MATTER
HOW THE SCOPE OF OUR AUDIT ADDRESSED THE KEY
AUDIT MATTER
Valuation
of property
portfolio
Refer to
accounting
policies on
investment
properties
and trading
properties on
page 122.
Refer to note
9 in relation to
the property
portfolio
and note 10
as regards
the trading
properties.
The valuation of property portfolio
Experience of external valuer and relevance of its work
requires significant judgement and
estimates by the Directors and the
independent external valuer and is
therefore considered a significant risk
due to the subjective nature of certain
We obtained the valuation report prepared by managements
independent external valuer and discussed the basis of the valuations
with them, confirming that the approach was consistent with the
requirements of accounting standards.
assumptions inherent in each valuation.
We assessed the competency, independence and objectivity of the
The Group’s property portfolio includes:
• Standing investment properties: these
are completed properties that are
currently let. They are valued using
the income capitalisation method.
•
Investment properties under
construction: these are properties
that were being developed. Such
assets had a different risk and
investment profile to standing assets.
They were valued using the residual
method (i.e. by estimating the fair
value of the completed asset less
estimated costs to completion and an
appropriate developer’s margin). The
development of Hudson Quarter in
York was completed in April 2021 and
therefore was a standing investment
property.
valuer which included making enquiries regarding interests and
relationships that may create a threat to the valuer’s objectivity.
We obtained a copy of the instructions provided to the valuer
and reviewed for any limitations in scope or for evidence of
Management bias.
Data provided to the valuer
We checked that the underlying data provided to the valuer by
Management was consistent with the data provided to us for our
audit work. This data included inputs such as current rent and
lease terms, which we agreed on a sample basis to executed lease
agreements as part of our audit work.
We checked the completeness of the data by agreeing a sample of
data from the tenancy schedule, which we obtained as part of our
audit of revenue, to the data provided to the valuer.
Assumptions and estimates used by the valuer
We used our knowledge and experience to evaluate and challenge
• Trading properties: these are
the valuation assumptions, methodologies and the unobservable
properties being developed with the
view to sell. They are measured at the
lower of the cost and estimated net
realisable value.
inputs used in the valuation of the properties. This included
establishing our own range of expectations for the yields used in
assessing the valuation of each of the Group’s properties based on
externally available metrics, comparable organisations and wider
The valuation of each property requires
consideration of the individual nature
of the asset, its location, cash flows and
comparable market transactions.
economic and commercial factors.
We assessed the valuation of the properties against our own
expectations and met with the valuer to challenge those valuations
which fell outside of our range of expectations.
Key observation:
Our testing indicated that the estimates and assumptions used in the
property valuations were appropriate in the context of the Group’s
property portfolio.
105
GOVERNANCE Independent Auditor’s Report
to the members of Palace Capital plc C O N T I N U E D
KEY AUDIT MATTER
HOW THE SCOPE OF OUR AUDIT ADDRESSED THE KEY
AUDIT MATTER
Revenue
recognition –
rental income
Refer to
accounting
policy on
revenue on page
119.
Refer to note
1 in relation to
Revenue.
The Group has several property managers
We obtained the tenancy schedule and Management’s analysis of
and multiple tenants across its property
revenue recognised for each tenant and the reconciliation of this
portfolio. Rental income revenue
analysis to the financial statements and performed the following:
recognition has a significant impact on
the allocation of resources and directing
the efforts of the audit team.
Rental income is recognised on a
straight line basis over the lease term
for the Group’s properties based upon
rental agreements that are in place.
Management judgement is required to
determine the term over which lease
incentives should be recognised.
A number of rent concessions have been
previously agreed with tenants as a result
of COVID-19 and judgement had been
• We checked the integrity of the formulae used in Management’s
reconciliation to the financial statements.
• We analysed the current year tenancy schedule compared to prior
year to highlight changes in the year to check that no income
has been omitted from the accounts and also any new tenancy
schedules have been highlighted and tested
• We analysed the amount of rental income recognised in the
financial statements in respect of each tenant and compared this
to our expectations for the year based on the prior year tenancy
schedule. This highlighted changes to existing tenant agreements
and also any new agreements entered into during the current
year. The changes, including new tenant agreements, were
investigated and agreed to the underlying lease documentation
and rent review memoranda.
involved in assessing whether these
• We obtained Management’s schedule of lease incentive
qualify as lease modifications.
There is a risk that the revenue
recognised as rental income is not
supported by underlying tenancy
agreements or is inappropriately
recognised.
We consider this to be a Key Audit Matter
(‘KAM’) based on the fact that there
are approximately 250 leases, a large
number of lease incentives and we have
historically raised audit adjustments in this
area. This is a fraud risk in that there is a
risk the lease term can be manipulated
which impacts on revenue recorded. This
exists for existing and new leases.
adjustments, including rent free periods and, for a sample,
we recalculated the adjustment and agreed the inputs to
the underlying lease documentation. We considered the
completeness of the schedule based on information included
in the tenancy schedule and the underlying lease information
obtained. Where applicable, we assessed management's
judgements and assertions for these not being a lease
modification.
• We traced a number of leases to management agent statements
and through to cash to test the existence and accuracy of the
revenue recognised.
• We obtained a breakdown of other revenue recognised in the
year including service charge and car park income. For a sample
of these transactions we agreed the revenue recognised to
supporting documentation to confirm its existence and accuracy.
• With regards to service charge income, we have verified the
split of revenue and cost of sales in the current and prior year
by tracing revenue amounts back to supporting documentation
to confirm existence and accuracy of amounts recognised
as revenue.
Key observations:
We did not identify any indicators to suggest that rental income has
been recognised inappropriately.
106
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 KEY AUDIT MATTER
HOW THE SCOPE OF OUR AUDIT ADDRESSED THE KEY
AUDIT MATTER
Going
Concern
Refer to page
118. As set out
in the accounting
policy on
going concern
management
have carried
out a detailed
assessment of
the Group’s
ability to
continue as a
going concern.
At the year end the Group has a number
Our response to this key audit matter and our evaluation of the
of borrowings due for renegotiation.
Directors’ assessment of the Group and the Parent Company’s ability
Consideration needs to be made around
to continue to adopt the going concern basis of accounting included:
the disclosure of these borrowings in
terms of classification in the accounts,
the timing of renewal in terms and
compliance with covenants in supporting
the of going concern assumption.
These loans also have financial covenants.
A breach of covenant on any of the loans,
either during the year or in the future,
could also impact the Group’s ability to
operate as a going concern. Accordingly
we considered going concern to be a key
audit matter.
• Obtaining management’s going concern paper and supporting
projections and testing the integrity of this model reviewing its
arithmetic accuracy and testing the formulas within the model.
• Assessing the appropriateness of assumptions made within this
model by comparing forecast results to our expectations based
on our knowledge of the business, most recent performance,
current economic factors.
• Considering the appropriateness of the sensitivities applied in
the model, namely through assessing the impact of ‘stress tests’
scenarios such as rent reductions as well as fall in investment
property values. This included considering the impact of these
on covenants or cash flow deficits to determine the likelihood of
those scenarios occurring.
• Where bank loans mature in the 12 month period from the date
of our audit report, we have discussed with management their
plans to refinance the debt and vouched to agreements that were
reached subsequent to the year end to confirm the assumptions
are appropriate.
• Reviewing the disclosures to check that they are in line with the
detailed assessment undertaken by the Board, including that it is
clear, understandable and complete.
We made enquiries of management and those charged with
governance as to any future events or conditions, outside of those
associated with the pandemic that may affect the Group’s ability to
continue as a going concern.
Key observations:
Based on the work we have performed, we have not identified
any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Group
and the Parent Company’s ability to continue as a going concern for
a period of at least twelve months from when the financial statements
are authorised for issue.
107
GOVERNANCE Independent Auditor’s Report
to the members of Palace Capital plc C O N T I N U E D
OUR APPLICATION OF MATERIALITY
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We
consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of
reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality
level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not
necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances
of their occurrence, when evaluating their effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality
as follows:
Materiality
GROUP FINANCIAL STATEMENTS
PARENT COMPANY FINANCIAL
STATEMENTS
2022
£m
2.9
2021
£m
3.0
2022
£m
1.7
2021
£m
1.63
Basis for determining materiality
Materiality for the Group and Parent Company’s financial statement was set at 1% of
total assets (2021: 1%).
Rationale for the
benchmark applied
Performance materiality
Basis for determining
performance materiality
Specific materiality
We determined that total assets would be the most appropriate basis for determining
overall materiality as we consider it to be one of the principal considerations for the
users of the financial statements in assessing the financial performance of the Group
and the Parent Company.
2.16
2.25
1.05
1.22
On the basis of our risk assessment, together with our assessment of the Group overall
control environment, our judgement was that overall performance materiality for the
Group should be 75% (2021: 75%) of materiality, which reflects our assessment of the
risk associated with the audit due to the limited number of audit adjustments identified
in previous audits. We determined that the same measure as the Group was appropriate
for the Parent Company.
We set a lower materiality for particular classes of transactions, balances or disclosures for which misstatements of lesser amounts than
materiality for the Group financial statements as a whole could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements. In this context, we applied a specific materiality of £590,000 (2021: £340,000) to those
items which may affect profit before tax, including revenue, cost of sales, administrative expenses, finance cost and finance income, and
taxation. The specific materiality represents 5% (2021: 5%) of profit before tax before revaluation of investments, debt termination costs,
changes in fair value of interest rate derivatives and gains on investment property sales.
108
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Component materiality
We set materiality for each component of the Group based on 1% (2021: 1%) of the total assets of that component. Component
materiality ranged from £109,000 to £546,000 (2021: ranged from £384,000 to £802,000). In the audit of each component, we further
applied performance materiality levels of 75% (2021: 75%) of the component materiality to our testing to ensure that the risk of errors
exceeding component materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £55,000 (2021: £60,000)
for items audited to financial statement materiality, and £11,200 (2021: £7,000) for items audited to specific materiality. We also agreed
to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.
OTHER INFORMATION
The directors are responsible for the other information. The other information comprises the information included in the Annual Report
and Accounts other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be
materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine
whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
CORPORATE GOVERNANCE STATEMENT
The Listing Rules require us to review the Directors’ statement in relation to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance
Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance
Statement is materially consistent with the financial statements or our knowledge obtained during the audit.
Going concern and longer-term
viability
• The Directors' statement with regards to the appropriateness of adopting the going
concern basis of accounting and any material uncertainties identified set out on pages
36 to 38; and
• The Directors’ explanation as to their assessment of the Group’s prospects, the period
this assessment covers and why the period is appropriate set out on page 38
Other Code provisions
• Directors' statement on fair, balanced and understandable set out on page 102;
• Board’s confirmation that it has carried out a robust assessment of the emerging and
principal risks set out on pages 36 to 43;
• The section of the annual report that describes the review of effectiveness of risk
management and internal control systems set out on page 36; and
• The section describing the work of the audit committee set out on pages 81 to 84
109
GOVERNANCE Independent Auditor’s Report
to the members of Palace Capital plc C O N T I N U E D
OTHER COMPANIES ACT 2006 REPORTING
Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies
Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
Strategic report and Directors’
report
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the Strategic report and the Directors’ report for the financial
year for which the financial statements are prepared is consistent with the financial
statements; and
•
the Strategic report and the Directors’ report have been prepared in accordance with
applicable legal requirements.
In the light of the knowledge and understanding of the Group and Parent Company
and its environment obtained in the course of the audit, we have not identified material
misstatements in the strategic report or the Directors’ report.
Directors’ remuneration
In our opinion, the part of the Directors’ remuneration report to be audited has been
properly prepared in accordance with the Companies Act 2006.
Matters on which we are
required to report by exception
We have nothing to report in respect of the following matters in relation to which the
Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the Parent Company, or returns
adequate for our audit have not been received from branches not visited by us; or
•
the Parent Company financial statements and the part of the Directors’ remuneration
report to be audited are not in agreement with the accounting records and returns; or
•
certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
RESPONSIBILITIES OF DIRECTORS
As explained more fully in Statement of Directors’ Responsibilities,
the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair
view, and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible
for assessing the Group’s and the Parent Company’s ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the
Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE
AUDIT OF THE FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor’s report that includes our opinion. Reasonable assurance
is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
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PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is detailed below:
We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and
considered the risk of acts by the Group that were contrary to applicable laws and regulations, including fraud. We performed our own
checks of compliance with relevant requirements including, but not limited to, the Companies Act 2006, the UK Listing Rules, the REIT
tax regime requirements and legislation relevant to the rental of properties. We considered compliance by the entity by obtaining their
papers on compliance, in addition to performing our own review.
Our tests included agreeing the financial statement disclosures to underlying supporting documentation where relevant, review of Board
and Committee meeting minutes, and enquiries with management , the Directors, and the Audit Committee as to their identification of
any non-compliance with laws and regulations and fraud.
We considered the potential for material misstatement in the financial statements, including those arising from fraud, and believed the
areas in which fraud could occur were, management override of controls, revenue recognition, and management bias in the accounting
for estimates, specifically in relation to the valuation of investment property. Our procedures to address these risks included:
• We addressed the risk of management override of internal controls by testing journals processed during and subsequent to the year
and evaluating whether there was evidence of bias by the Directors that represented a risk of material misstatement due to fraud
• We evaluated the valuation of investment property which we consider is the greatest area for risk of management manipulation, as
mentioned under the key audit matters section of our report, for any management bias.
• The fraud risk around revenue recognition was addressed by inspecting signed lease agreements to recalculate the annual turnover,
and agreeing cash receipts to managing agent statements to check customers exist and that the management information did agree
for a sample of tenants.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of
not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve
deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit
procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in
the financial statements, the less likely we are to become aware of it.
A further description of our responsibilities is available on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
USE OF OUR REPORT
This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required
to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report,
or for the opinions we have formed.
Charles Ellis
S E N I O R STAT U TO R Y AU D I TO R
For and on behalf of BDO LLP, Statutory Auditor
London
United Kingdom
13 June 2022
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
111
GOVERNANCE Annual Report and
Accounts 2022
Financials
112
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 FINANCIALS
Consolidated Statement
of Comprehensive Income
Consolidated Statement
of Financial Position
Consolidated Statement
of Changes in Equity
Consolidated Statement
of Cash Flows
Notes to the Consolidated
Financial Statement
Company Statement
of Financial Position
Company Statement
of Changes in Equity
Notes to the Company
Financial Statements
Officers and Professional Advisors
Glossary
114
115
116
117
118
149
150
151
156
157
113
FINANCIALS Consolidated Statement of Comprehensive Income
FOR THE YEAR ENDED 31 MARCH 2022
Revenue
Cost of sales
Movement in expected credit loss
Net property income
Dividend income from listed equity investments
Administrative expenses
Operating profit before gains and losses on property assets, listed equity investments
and cost of acquisitions
Profit on disposal of investment properties
Gain/(loss) on revaluation of investment property portfolio
Reversal of impairment
Loss on disposal of listed equity investments
Gain on revaluation of listed equity investments
Operating profit/(loss)
Finance income
Finance expense
Debt termination costs
Changes in fair value of interest rate derivatives
Profit/(loss) before taxation
Taxation
Profit/(loss) after taxation for the year and total comprehensive income attributable
to owners of the Parent
Earnings per ordinary share
Basic
Diluted
2022
£’000
49,064
(30,408)
360
19,016
64
(4,623)
14,457
4,946
8,222
–
(80)
–
27,545
–
(3,196)
(63)
329
24,615
(67)
Restated*
2021
£’000
22,242
(6,426)
(949)
14,867
72
(4,347)
10,592
905
(14,750)
763
–
709
(1,781)
1
(3,347)
(140)
(265)
(5,532)
(1)
24,548
(5,533)
53.1p
53.0p
(12.0p)
(12.0p)
Note
1
3b
13
3c
9
10
11
2
5
6
6
All activities derive from continuing operations of the Group. The notes form an integral part of these financial statements.
*For information on the restatement please see the note on page 116.
114
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Consolidated Statement of Financial Position
AS AT 31 MARCH 2022
Non-current assets
Investment properties
Listed equity investments at fair value
Right of use asset
Property, plant and equipment
Current assets
Trading property
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Borrowings
Lease liabilities for right of use asset
Derivative financial instruments
Creditors: amounts falling due within one year
Net current assets
Non-current liabilities
Borrowings
Deferred tax liability
Lease liabilities for investment properties
Derivative financial instruments
Net assets
Equity
Called up share capital
Treasury shares
Merger reserve
Capital redemption reserve
Capital reduction reserve
Retained earnings
Equity – attributable to the owners of the Parent
Basic NAV per ordinary share
Diluted NAV per ordinary share
Note
9
11
12
12
10
13
14
15
17
20
16
17
5
20
16
21
7
7
2022
£’000
232,717
–
17
45
232,779
20,287
7,412
28,143
55,842
288,621
(8,912)
(32,749)
–
(47)
(41,708)
14,134
(68,488)
(143)
(1,078)
–
177,204
4,639
(717)
3,503
340
125,019
44,420
177,204
383p
383p
2021
£’000
235,854
3,249
165
71
239,339
42,719
9,764
9,417
61,900
301,239
(12,908)
(21,853)
(154)
–
(34,915)
26,985
(105,432)
(228)
(1,804)
(1,029)
157,831
4,639
(1,288)
3,503
340
125,019
25,618
157,831
343p
342p
These financial statements were approved by the Board of Directors and authorised for issue on 13 June 2022 and are signed on its
behalf by:
MATTHEW SIMPSON
Chief Financial Officer
115
FINANCIALS Consolidated Statement of Changes in Equity
FOR THE YEAR ENDED 31 MARCH 2022
Share
Capital
£’000
Share
Premium
£’000
Note
Treasury
Share
Reserve
£’000
Other
Reserves
£’000
Capital
Reduction
Reserve
£’000
Retained
Earnings
£’000
At 31 March 2020
Total comprehensive income for the year
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends paid
Transfer to capital reduction reserve
account
At 31 March 2021
Total comprehensive income for the year
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends paid
At 31 March 2022
22
8
22
8
4,639
–
–
–
–
–
–
4,639
–
–
–
–
–
4,639
125,019
–
–
–
–
–
(125,019)
–
–
–
–
–
–
–
(1,349)
–
–
61
–
–
–
(1,288)
–
–
571
–
–
(717)
3,843
–
–
–
–
–
–
3,843
–
–
–
–
–
3,843
–
–
–
–
–
–
125,019
125,019
–
–
–
–
–
125,019
34,196
(5,533)
300
(61)
171
(3,455)
–
25,618
24,548
162
(571)
90
(5,427)
44,420
Total
Equity
£’000
166,348
(5,533)
300
–
171
(3,455)
–
157,831
24,548
162
–
90
(5,427)
177,204
The share capital represents the nominal value of the issued share capital of Palace Capital plc.
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the
share issue.
Treasury shares represents the consideration paid for shares bought back from the market.
Other reserves comprise the merger reserve and the capital redemption reserve.
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by
the issue of shares in accordance with S612 of the Companies Act 2006.
The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.
The capital reduction reserve represents distributable profits generated as a result of the share premium reduction.
116
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Consolidated Statement of Cash Flows
FOR THE YEAR ENDED 31 MARCH 2022
2022
£’000
24,615
–
3,196
(329)
(8,222)
(4,946)
–
80
–
63
48
148
162
2,289
(2,929)
21,972
36,147
–
(3,417)
(48)
32,682
(9,870)
(6,519)
–
31,221
–
3,169
64
(22)
18,043
(38,033)
11,472
(11)
(5,427)
(31,999)
18,726
9,417
28,143
Restated*
2021
£’000
(5,532)
(1)
3,347
265
14,750
(905)
(763)
–
(709)
140
46
148
300
491
(291)
(14,646)
(3,360)
1
(3,575)
(1,174)
(8,108)
–
(2,425)
(4,131)
5,290
1,020
–
72
(16)
(190)
(11,363)
18,916
(282)
(3,455)
3,816
(4,482)
13,899
9,417
Note
2
9
10
11
12
12
22
14
12
19
19
19
8
14
Operating activities
Profit/(loss) before taxation
Finance income
Finance expense
Changes in fair value of interest rate derivatives
(Gain)/loss on revaluation of investment property portfolio
Profit on disposal of investment properties
Reversal of impairment of trading properties
Loss on disposal of listed equity investments
Gain on revaluation of listed equity investments
Debt termination costs
Depreciation of tangible fixed assets
Amortisation of right of use asset
Share-based payments
Decrease in receivables
Decrease in payables
Decrease/(increase) in trading property
Net cash generated from operations
Interest received
Interest and other finance charges paid
Corporation tax paid in respect of operating activities
Net cash flows from operating activities
Investing activities
Purchase of investment properties
Capital expenditure on refurbishment of investment property
Capital expenditure on developments
Proceeds from disposal of investment property
Amounts transferred from restricted cash deposits
Disposal of non-current asset – equity investment
Dividends from listed equity investments
Purchase of property, plant and equipment
Net cash flow used in investing activities
Financing activities
Bank loans repaid
Proceeds from new bank loans
Loan issue costs paid
Dividends paid
Net cash flow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at the end of the year
*For information on the restatement please see the note on page 116.
117
FINANCIALS Notes to the Consolidated Financial Statements
BASIS OF ACCOUNTING
The consolidated financial statements of the Group comprise the results of Palace Capital plc (“the Company”) and its subsidiary
undertakings.
The Company is quoted on the Main Market of the London Stock Exchange and is domiciled and registered in England and Wales and
incorporated under the Companies Act. The address of its registered office is 4th Floor, 25 Bury Street, St James’s, London, United
Kingdom, SW1Y 6AL.
BASIS OF PREPARATION
On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted
International Accounting Standards, with future changes being subject to endorsement by the UK Endorsement Board. The Group
transitioned to UK-adopted International Accounting Standards in its consolidated financial statements on 1 January 2021. This change
constitutes a change in accounting framework however, there is no impact on recognition, measurement or disclosure.
The Group financial statements have been prepared in accordance with UK-adopted International Accounting Standards, (the ‘applicable
framework’), and have been prepared in accordance with the provisions of the Companies Act 2006 (the ‘applicable legal requirements’).
The Group financial statements have been prepared under the historical cost convention as modified by the revaluation of investment
properties, the revaluation of property, plant and equipment, pension scheme, and financial assets and liabilities held at fair value.
RESTATEMENTS
The Consolidated Statement of Cash Flows for the comparative period has been corrected to present cash outflows from an increase
in trading properties as operating activities for the year to 31 March 2021 of £14,646,000 that were previously presented as investing
activities. This has resulted in an increase in the net movement in investing activities for the year to 31 March 2021 of £14,646,000 and
a corresponding net decrease in the cash inflows from operating activities in the Consolidated Statement of Cash Flows. These cash
flows represent expenditure on trading properties that were expected to be sold in the normal course of the Group's business and are
therefore operating in nature. There was no impact on profit or net assets for any periods presented.
The Consolidated Statement of Comprehensive Income for the comparative period has been corrected to present service charge income
in revenue and recoverable service charge costs in cost of sales. The Group has control over the services being provided, and ultimately
the risk of paying and recovering these costs sit with the Group. Therefore, these receipts and recoverable expenses are presented gross
in the Statement of Comprehensive Income. This has resulted in the Group recognising £4,926,000 as service charge income within
revenue and a corresponding £4,926,000 in recoverable service charge costs in the cost of sales line. There was no impact on profit
or net assets for any periods presented. The revenue and cost of sales for the year ended 31 March 2021 were therefore restated to
£22,242,000 and £6,426,000 respectively, from £17,316,000 and £1,500,000.
GOING CONCERN
The Directors have made an assessment of the Group’s ability to continue as a going concern which included the current uncertainties
created by Covid-19, coupled with the Group’s cash resources, borrowing facilities, rental income, acquisitions and disposals of
investment properties, committed capital and other expenditure and dividend distributions.
The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in
the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these
financial statements. In addition, note 26 to the financial statements includes the Group’s objectives, policies and processes for managing
its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk.
As at 31 March 2022 the Group had £28.1m of unrestricted cash and cash equivalents, a low gearing level of 28% and a property
portfolio with a fair value of £259.0m. The Directors have reviewed the forecasts for the Group taking into account the impact of Covid-19
on trading over the 12 months from the date of signing this annual report. The forecasts have been assessed against a range of possible
downside outcomes incorporating significantly lower levels of income in line with the possible ongoing effects of the pandemic. See
Going Concern and Viability Statement on pages 36 to 38 for further details.
The Directors have a reasonable expectation that the Group have adequate resources to continue in operation for at least 12 months
from the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the
financial statements.
118
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 NEW STANDARDS ADOPTED DURING THE YEAR
New standards effective for the year ended 31 March 2022 did not have a material impact on the financial statements and were
not adopted.
New standards issued but not yet effective
There are no other standards that are not yet effective that would be expected to have a material impact on the Group in the current or
future reporting periods and on the foreseeable future transactions.
SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements incorporate the financial statements of Palace Capital plc and its subsidiaries as at the
year-end date.
Subsidiaries are all entities (including special purpose entities) over which the Company has control. The Company controls an entity
when the following three elements are present: power to direct the activities of the entity; exposure to variable returns from the entity;
and the ability of the Company to use its power to affect those variable returns. Where necessary, adjustments have been made to the
financial statements of subsidiaries and associates to bring the accounting policies used and accounting periods into line with those of
the Group. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the
Consolidated Financial Statements.
The results of subsidiaries acquired during the year are included from the effective date of acquisition, being the date on which the
Group obtains control until the date that control ceases.
The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and
the equity interests issued by the Group. This fair value includes any contingent consideration. Acquisition-related costs are expensed
as incurred.
If the consideration is less than the fair value of the assets and liabilities acquired, the difference is recognised directly in the Statement of
Comprehensive Income.
Where an acquired subsidiary does not meet the definition of a business, it is accounted for as an asset acquisition rather than a business
combination. A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of
providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from
ordinary activities.
Revenue
Revenue is primarily derived from property income and represents the value of accrued charges under operating leases for rental of
the Group’s investment properties. Revenue is measured at the fair value of the consideration received. All income is derived in the
United Kingdom.
Rental income from investment properties leased out under operating leases is recognised in the Statement of Comprehensive
Income on a straight-line basis over the term of the lease. Contingent rent reviews are recognised when such reviews have been
agreed with tenants. Lease incentives, rent concessions and guaranteed rent review amounts are recognised as an integral part of the
net consideration for use of the property and amortised on a straight-line basis over the term of lease. Judgement is exercised when
determining the term over which the lease incentives should be recognised.
Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Group Statement of
Comprehensive Income when the right to receive them arises. Surrender premium income are payments received from tenants to
surrender their lease obligations and are recognised immediately in the Group’s Consolidated Statement of Comprehensive Income.
Insurance commissions are recognised as performance obligations are fulfilled in terms of the individual performance obligations within
the contract with the insurance provider. Revenue is determined by the transaction price in the contract and is measured at the fair value
of the consideration received. Revenue is recognised once the underlying contract between insured and insurer has been signed.
Revenue from the sale of trading properties is recognised when control of the trading property, along with the significant risks and
rewards, have transferred from the Group, which is usually on completion of contracts and transfer of property title.
Service charge income relates to expenditure that is directly recoverable from tenants. Service charge income is recognised as revenue
in the period to which it relates as required by IFRS 15 Revenue from Contracts with Customers. Dividend income comprises dividends
from the Group’s listed equity investments and is recognised when the Shareholder’s right to receive payment is established. Revenue is
measured at the fair value of the consideration received. All income is derived in the United Kingdom.
119
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
The disposal of investment properties is recognised when significant risks and rewards attached to the property have transferred from
the Group. This will ordinarily occur on completion of contract, with such transactions being recognised when this condition is satisfied.
The profit or loss on disposal of investment property is recognised separately in the Consolidated Statement of Comprehensive Income
and is the difference between the net sales proceeds and the opening fair value asset plus any capital expenditure during the period to
disposal.
Deferred income
Where invoices to customers have been raised which relate to a period after the Group year end, being 31 March 2022, the Group will
recognise deferred income for the difference between revenue recognised and amounts billed for that contract.
Cost of sales
Cost of sales includes direct expenditure relating to the construction of the trading properties, capitalised interest, and selling costs
incurred as a result of residential sales. Selling costs includes agent and legal fees. Cost of sales is expensed to the income statement and
is recognised on completion of each residential unit. The cost for each unit is calculated using the ratio of the unit selling price, over the
total forecasted sales proceeds of all residential units. This ratio is then applied to the total forecasted development cost to get the cost
of sale per unit.
Service charges and other such receipts arising from expenses recharged to tenants are as stated in note 3b. Notwithstanding that the
funds are held on behalf of the occupiers, the ultimate risk for paying and recovering these costs rests with the Group.
Borrowing costs
Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. After
initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised
cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised
in profit or loss in the Consolidated Statement of Comprehensive Income when the liabilities are derecognised, as well as through the
amortisation process.
Borrowing costs directly attributable to development properties are capitalised and not recognised in profit or loss in the Consolidated
Statement of Comprehensive Income. The capitalisation of borrowing costs is suspended if there are prolonged periods when
development activity is interrupted and cease at the completion of the development. Interest is also capitalised on the purchase cost of a
site of property acquired specifically for redevelopment, but only where activities necessary to prepare the asset for redevelopment are in
progress.
Interest associated with trading properties is capitalised. Interest is capitalised from the start of the development work until the date of
practical completion. The rate used is the rate on specific associated borrowings. Interest is then expensed through the income statement
post completion of the development.
When the Group refinances a loan facility, the Group considers whether the new terms are substantially different from a quantitative and
a qualitative perspective. From a quantitative perspective, the terms are substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at
least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability. Modifications
that would be considered substantial from a qualitative perspective are those that result in a significant value transfer and/or a new
underwriting/pricing assessment of the financial instrument.
If it is deemed to be a substantial modification of terms, this is accounted for as an extinguishment, and any costs or fees incurred are
recognised as part of the gain or loss on the extinguishment. If the modification is not accounted for as an extinguishment, any costs or
fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.
Where the modification is not considered to be substantial, the loan continues to be measured at amortised cost using the original
effective interest rate. Where the modification is substantial, the new effective interest rate is used.
Financial assets
The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was
acquired. The Group’s accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises in-the-money derivatives (see “Financial liabilities” section for out-of-the-money derivatives classified as
liabilities). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the
Consolidated Statement of Comprehensive Income in the finance income or expense line.
120
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Amortised cost
Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9
using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-
payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from
default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such
provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the Consolidated
Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the
asset is written off against the associated provision.
The Group’s financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the
Consolidated Statement of Financial Position.
Listed equity investments
Listed equity investments are classified at fair value through profit and loss. Listed equity investments are subsequently measured using
Level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in profit or loss in the
Consolidated Statement of Comprehensive Income.
Fair value hierarchy
• Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
• Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly
observable.
• Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For
assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have
occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with
original maturities of three months or less.
Financial liabilities
The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The
Group’s accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises out-of-the-money derivatives (see “Financial assets” for in-the-money derivatives where the time value offsets
the negative intrinsic value). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value
recognised in the Consolidated Statement of Comprehensive Income.
Amortised cost
Trade payables and accruals are initially measured at fair value and are subsequently measured at amortised cost, using the effective
interest rate method.
Other financial liabilities
Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such
interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any
interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the Consolidated Statement
of Financial Position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium
payable on redemption, as well as any interest or coupon payment while the liability is outstanding.
Contributions to pension schemes
The Company operates a defined contribution pension scheme. The pension costs charged against profits are the contributions payable
to the scheme in respect of the accounting period.
121
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
Investment properties
Investment properties are those properties that are held either to earn rental income or for capital appreciation or both.
Investment properties are measured initially at cost including transaction costs and thereafter are stated at fair value, which reflects
market conditions at the balance sheet date. Surpluses and deficits arising from changes in the fair value of investment properties are
recognised in the Consolidated Statement of Comprehensive Income in the year in which they arise.
Investment properties are stated at fair value as determined by the independent external valuers. The fair value of the Group’s property
portfolio is based upon independent valuations and is inherently subjective. The fair value represents the amount at which the assets
could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length transaction at the
date of valuation, in accordance with Global Valuation Standards. In determining the fair value of investment properties, the independent
valuers make use of historical and current market data as well as existing lease agreements.
The Group recognises investment property as an asset when it is probable that the economic benefits that are associated with the
investment property will flow to the Group and it can measure the cost of the investment reliably. This is usually the date of completion of
acquisition or completion of construction if the development is a mixed-use scheme.
Investment properties cease to be recognised on completion of the disposal or when the property is withdrawn permanently from use
and no future economic benefit is expected from disposal.
The Group evaluates all its investment property costs at the time they are incurred. These costs include costs incurred initially to acquire
an investment property and costs incurred subsequently to add to, replace part of, or service a property. Any costs deemed as repairs
and maintenance or any costs associated with the day-to-day running of the property are recognised in the Consolidated Statement of
Comprehensive Income as they are incurred.
Investment properties under construction are initially recognised at cost (including any associated costs), which reflects the Group’s
investment in the assets. The Group undertakes certain works including demolition, remediation and other site preparatory works to bring
a site to the condition ready for construction of an asset. Subsequently, the assets are remeasured to fair value at each reporting date.
The fair value of investment properties under construction is estimated as the fair value of the completed asset less any costs still payable
in order to complete, and an appropriate developer’s margin.
Trading properties
Trading property is developed for sale or held for sale after development is complete, and is carried at the lower of cost and net
realisable value. Trading properties are derecognised on completion of sales contracts. Costs include direct expenditure and capitalised
interest. Cost of sales, including costs associated with off-plan residential sales, are expensed to the Consolidated Statement of
Comprehensive Income as incurred.
Right of use asset
Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:
•
•
•
lease payments made at or before commencement of the lease;
initial direct costs incurred; and
the amount of any provision recognised where the Group is contractually required to dismantle, remove or restore the leased asset.
Subsequent to initial measurement, lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding
and are reduced for lease payments made. Right of use assets are amortised on a straight-line basis over the remaining term of the lease
or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term. Lease liabilities are remeasured
when there is a change in future lease payments arising from a change in an index or rate or when there is a change in the assessment of
the term of any lease.
The rate of amortisation for right of use assets is over the period of the lease.
Lease liabilities
Lease obligations include lease obligations relating to investment properties and lease obligations relating to right of use assets.
Lease obligations relating to investment properties are capitalised at the lease’s commencement and are measured at the present value
of the remaining lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant
rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in liabilities. The
finance charges are charged to the Consolidated Statement of Comprehensive Income over the lease period so as to produce a constant
periodic rate of interest on the remaining balance of the liability for each period. Investment properties classified as held under lease
liabilities are subsequently carried at their fair value.
122
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Lease obligations relating to right of use assets are measured at the present value of the contractual payments due to the lessor over the
lease term, discounted at the Group’s incremental borrowing rate. Variable lease payments are only included in the measurement of the
lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element
will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they relate.
On initial recognition, the carrying value of the lease liability also includes:
• amounts expected to be payable under any residual value guarantee;
•
the exercise price of any purchase option granted in favour of the Group if it is reasonable certain to assess that option;
• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option,
being exercised.
Property, plant and equipment and depreciation
Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is calculated to write
down the cost less estimated residual value of all tangible fixed assets by equal annual instalments over their expected useful economic
lives. The rates generally applicable are:
Fixtures, fittings and equipment 25% – 33% straight-line
Current taxation
Current tax assets and liabilities for the period not under UK REIT regulations are measured at the amount expected to be recovered
from or paid to the tax authorities. The tax rates and the tax laws used to compute the amount are those that are enacted or substantively
enacted, by the balance sheet date.
Deferred taxation
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the
financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance
sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be
utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other
than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive
income, in which case the deferred tax is also dealt with in other comprehensive income.
The Government announced a proposal in March 2021 for an increase in the corporation tax rate from 19% main rate in the tax year 2021
to 25% with effect from 1 April 2023. This was enacted by the Finance Bill 2021 on 10 June 2021.
Dividends to equity holders of the parent
Interim ordinary dividends are recognised when paid and final ordinary dividends are recognised as a liability in the period in which they
are approved by the Shareholders.
Share-based payments
The fair value of the share options are determined at the grant date and are expensed on a straight-line basis over the vesting period.
Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting
date so that ultimately the cumulative amount recognised over the vesting period is based on the number of options that eventually vest.
Non-vesting conditions and market vesting conditions are factored into the fair values of the options granted. As long as all other vesting
conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is
not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.
Commitments and contingencies
Commitments and contingent liabilities are disclosed in the financial statements. They are disclosed unless the possibility of an outflow of
resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when
an inflow of economic benefits is probable. A contingent asset is recognised when the realisation of the income is virtually certain.
123
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
Equity
The share capital represents the nominal value of the issued share capital of Palace Capital plc.
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the
share issue.
Treasury share reserve represents the consideration paid for shares bought back from the market.
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by
the issue of shares in accordance with S612 of the Companies Act 2006.
The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.
The capital reduction reserve represents distributable profits generated as a result of the share premium reduction.
Critical accounting judgements and key sources of estimation and uncertainty
The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Information about such judgements and estimation is contained in the
accounting policies or the notes to the accounts, and the key areas are summarised below.
Estimates
Properties
The key source of estimation uncertainty rests in the values of property assets, which significantly affects the value of investment
properties in the Consolidated Statement of Financial Position. The investment property portfolio and assets held for sale are carried
at fair value, which requires a number of estimates in assessing the Group’s assets relative to market transactions. The approach to this
valuation and the amounts affected are set out in the accounting policies and note 9.
Trading properties are held at the lower of cost and net realisable value. Net realisable value is the value of an asset that can be realised
upon the sale of the asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the asset.
The Group has valued the investment properties at fair value. To the extent that any future valuation affects the fair value of the
investment properties and assets held for sale, this will impact on the Group’s results in the period in which this determination is made.
Expected credit loss model
The Group applies the IFRS 9 simplified approach to the expected credit loss model, using 12 months of historic rental payment
information for tenants, and adjusting risk profile rates based on forward-looking information. Despite the unlocking of the UK economy
during 2021, we remain cautious as global supply chain issues and rising inflation continue to create economic uncertainty.
With the relaxation of restrictions from the Covid-19 pandemic the risk of certain tenants defaulting on their rents has reduced, although
challenges remain in the leisure and retail sectors. This has resulted in the ECL provisions calculated at 31 March 2022 being lower than in
previous periods (refer to note 13).
In arriving at our estimates, we have considered the tenants at higher risk, particularly in the leisure and retail sectors, those in administration
or CVA, and those tenants who have been impacted financially by the pandemic who are not necessarily in high-risk sectors.
124
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Estimates and Judgements
Share-based payments
Equity-settled share awards are recognised as an expense based on their fair value at date of grant. The fair value of equity-settled
share options is estimated through the use of option valuation models, which require inputs such as the risk-free interest rate, expected
dividends, expected volatility and the expected option life, and is expensed over the vesting period. Some of the inputs used are not
market observable and are based on estimates derived from available data. The models utilised are intended to value options traded in
active markets. The share options issued by the Group, however, have a number of features that make them incomparable to such traded
options (see note 22 on page 142 for further details). The variables used to measure the fair value of share-based payments could have
a significant impact on that valuation, and the determination of these variables requires a significant amount of professional judgement.
A minor change in a variable which requires professional judgement, such as volatility or expected life of an instrument, could have a
quantitatively material impact on the fair value of the share-based payments granted, and therefore will also result in the recognition of a
higher or lower expense in the Consolidated Statement of Comprehensive Income.
Judgement is also exercised in assessing the number of options subject to non-market vesting conditions that will vest.
1. RENTAL AND OTHER INCOME
The chief operating decision maker (“CODM”) takes the form of the Executive Directors (the Group’s Executive Committee). The Group’s
Executive Committee are of the opinion that the principal activity of the Group is to invest in commercial real estate in the UK.
Operating segments are identified on the basis of internal financial reports about components of the Group that are regularly reviewed
by the CODM.
The internal financial reports received by the Group’s Executive Committee contain financial information at a Group level as a whole
and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements.
Additionally, information is provided to the Group’s Executive Committee showing gross property income and property valuation by
individual property. Therefore, each individual property is considered to be a separate operating segment in that its performance is
monitored individually.
The Directors have considered the requirements of IFRS 8 as to aggregation of operating segments into reporting segments. All of the
Group’s revenue is generated from investment and trading properties located outside of London. The properties are managed as a single
portfolio by an asset management team whose responsibilities are not segregated by location or type but are managed on an asset-by-
asset basis.
The route to market is determined by reference to the current economic circumstances that fluctuate through the life cycle of the
portfolio. The Group holds a diversified portfolio across different sectors including office, industrial, retail, leisure, retail warehouse and
residential. The Group does from time to time engage in development projects. The Directors view the Group’s development activities as
an integral part of the life cycle of each of its assets rather than a separate business or division.
The Directors therefore consider that the individual properties have similar economic characteristics and therefore have been aggregated
into a single reportable segment under the provision of IFRS 8.
All of the Group’s properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided
to the Group’s Executive Committee and, therefore, no geographical segmental analysis is required.
Revenue – type
Gross rental income
Dilapidations and other property related income
Insurance commission
Gross property income
Service charge income
Trading property income
Total revenue
2022
£’000
16,670
732
92
17,494
4,155
27,415
49,064
Restated
2021
£’000
17,150
56
110
17,316
4,926
–
22,242
No single tenant accounts for more than 10% of the Group’s total rents received from investment properties. Similarly, there was no
individual or corporate that accounts for more than 10% of the trading property income.
125
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
2. INTEREST PAYABLE AND SIMILAR CHARGES
Interest on bank loans
Amortisation of loan arrangement fees
Interest on lease liabilities
Other finance charges
3. PROFIT FOR THE YEAR
a) The Group’s profit for the year is stated after charging the following:
Depreciation of tangible fixed assets and amortisation of right of use assets:
Auditor’s remuneration:
Fees payable to the Auditor for the audit of the Group’s annual accounts
Fees payable to the Auditor for the audit of the subsidiaries’ annual accounts
Additional fees payable to the Auditor in respect of the 2020 audit
Fees payable to the Auditor and its related entities for other services:
Audit related assurance services in respect of the interim results
b) The Group’s cost of sales comprise the following:
Void, investment and development property costs
Legal, lettings and consultancy costs
Property operating expenses
Service charge expenses
Trading property cost of sales
c) The Group’s administrative expenses comprise the following:
Staff costs
Accounting and audit fees
Other overheads
Consultancy and recruitment fees
Stock Exchange costs
Share-based payments
PR and marketing costs
Amortisation of right of use asset
Rent, rates and other office costs
Legal and professional fees
Depreciation of tangible fixed assets
2022
£’000
2,748
305
–
143
3,196
2022
£’000
196
165
29
–
11
205
2022
£’000
2,310
328
2,638
4,155
23,615
30,408
2022
£’000
2,895
269
260
254
235
162
150
148
140
62
48
4,623
2021
£’000
2,898
300
105
44
3,347
2021
£’000
194
143
27
23
10
203
2021
£’000
1,275
225
1,500
4,926
–
6,426
2021
£’000
2,642
297
244
110
208
300
118
148
125
109
46
4,347
126
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 3. PROFIT FOR THE YEAR CONTINUED
d) EPRA cost ratios are calculated as follows:
Gross property income
Administrative expenses
Property operating expenses
Movement in expected credit loss
EPRA costs (including property operating expenses)
EPRA cost ratio (including property operating expenses)
Less property operating expenses
EPRA costs (excluding property operating expenses)
EPRA cost ratio (excluding property operating expenses)
Total expense ratio
4. EMPLOYEES AND DIRECTORS’ REMUNERATION
Staff costs during the period were as follows:
Non-Executive Directors’ fees
Wages and salaries
Pensions
Social security costs
Share-based payments
The average number of employees of the Group and the Company during the period was:
Directors
Senior management and other employees
Key management are the Group’s Directors. Remuneration in respect of key management was as follows:
Emoluments for qualifying services
Social security costs
Pension
Share-based payments
2022
£’000
17,494
4,623
2,638
(360)
6,901
39.4%
(2,638)
4,263
24.4%
1.6%
2022
£’000
195
2,357
116
227
2,895
162
3,057
2021
£’000
17,316
4,347
1,500
949
6,796
39.2%
(1,500)
5,296
30.6%
1.4%
2021
£’000
196
2,119
102
225
2,642
300
2,942
2022
Number
2021
Number
7
9
16
2022
£’000
1,423
185
25
1,633
116
1,749
7
9
16
2021
£’000
1,218
167
36
1,421
241
1,662
127
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
5. TAXATION
Tax underprovided in prior year
Current income tax charge
Deferred tax
Tax charge
Profit/(loss) on ordinary activities before tax
Based on profit/(loss) for the period: Theoretical Tax at 19% (2021: 19%)
Effect of:
Net expenses not deductible for tax purposes
Tax underprovided in prior years
Movement on sale and revaluation not recognised through deferred tax
Deferred tax released to profit and loss on REIT conversion
Residual losses not recognised for deferred tax
Gain on appropriation for Hudson Quarter
REIT exempt income
Non-taxable items
Tax charge for the period
2022
£’000
–
152
(85)
67
2022
£’000
24,615
4,677
51
–
–
(85)
(345)
119
(1,985)
(2,365)
67
2021
£’000
1
–
–
1
2021
£’000
(5,532)
(1,051)
(32)
1
(145)
–
–
–
(1,622)
2,850
1
As a result of the Company’s conversion to a REIT on 1 August 2019, the Group is no longer required to pay UK corporation tax in
respect of property rental income and capital gains relating to its property rental business.
Deferred taxes relate to the following:
Deferred tax liability – brought forward
Tax rate increase from 19% to 25%
Deferred tax release on sale of trading property
Deferred tax liability – carried forward
Investment property unrealised valuation gains
Deferred tax liability – carried forward
2022
£’000
(228)
(34)
119
(143)
2022
£’000
(143)
(143)
2021
£’000
(228)
–
–
(228)
2021
£’000
(228)
(228)
A deferred tax liability on the revaluation of investment properties to fair value has been provided totalling £143,000 (2021: £228,000) as
once the availability of capital losses, indexation allowances and the 1982 valuations for certain properties have been taken into account,
it is anticipated that capital gains tax would be payable if the properties were disposed of at their fair value. The deferred tax liability
relates to investment properties transferred into trading stock, prior to the Group becoming a REIT. As at 31 March 2022 the Group had
approximately £5,915,000 (2021: £9,694,000) of realised capital losses to carry forward. There has been no deferred tax asset recognised
as the Directors do not consider it probable that future taxable profits will be available to utilise these losses.
Finance Act 2021 sets the main rate of UK corporation tax at 19%, with an increase in the main rate to 25% with effect from 1 April 2023.
The deferred tax liability relates to trading properties and has been calculated on the basis of 19% due to the expectation that all
properties are sold ahead of April 2023.
128
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 6. EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share and diluted earnings per share have been calculated on profit after tax attributable to ordinary Shareholders
for the year (as shown on the Consolidated Statement of Comprehensive Income) and for the earnings per share, the weighted average
number of ordinary shares in issue during the period (see table below) and for diluted weighted average number of ordinary shares in
issue during the year (see table below).
Profit/(loss) after tax attributable to ordinary Shareholders for the year
Weighted average number of shares for basic earnings per share
Dilutive effect of share options
Weighted average number of shares for diluted earnings per share
Earnings per ordinary share
Basic
Diluted
Key Performance Measures
2022
£’000
24,548
2021
£’000
(5,533)
2022
No. of shares
2021
No. of shares
46,257,514
36,766
46,294,280
46,061,417
–
46,061,417
53.1p
53.0p
(12.0p)
(12.0p)
The Group financial statements are prepared under IFRS which incorporates non-realised fair value measures and non-recurring
items. Alternative Performance Measures (“APMs”), being financial measures which are not specified under IFRS, are also used by
management to assess the Group’s performance. These include a number of European Public Real Estate Association (“EPRA”) measures,
prepared in accordance with the EPRA Best Practice Recommendations reporting framework the latest update of which was issued in
November 2019. The Group reports a number of these measures (detailed in the glossary of terms) because the Directors consider
them to improve the transparency and relevance of our published results as well as the comparability with other listed European real
estate companies.
EPRA EPS and EPRA Diluted EPS
EPRA Earnings is a measure of operational performance and represents the net income generated from the operational activities. It is
intended to provide an indicator of the underlying income performance generated from the leasing and management of the property
portfolio. EPRA earnings are calculated taking the profit after tax excluding investment property revaluations and gains and losses on
disposals, changes in fair value of financial instruments, associated close-out costs, one-off finance termination costs and other one-off
exceptional items. EPRA earnings is calculated on the basis of the basic number of shares in line with IFRS earnings as the dividends to
which they give rise accrue to current Shareholders.
Adjusted profit before tax and Adjusted EPS
The Group also reports an adjusted earnings measure which is based on recurring earnings before tax and the basic number of shares.
This is the basis on which the Directors consider dividend cover. This takes EPRA earnings as the starting point and then adds back tax
and any other fair value movements or one-off items that were included in EPRA earnings. This includes share-based payments being a
non-cash expense. The corporation tax charge (excluding deferred tax movements, being a non-cash expense) is deducted in order to
calculate the adjusted earnings per share, if the charge is in relation to recurring earnings.
129
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
6. EARNINGS PER SHARE CONTINUED
The EPRA and adjusted earnings per share for the period are calculated based upon the following information:
Profit/(loss) for the year
Adjustments:
(Gain)/loss on revaluation of investment property portfolio
Reversal of impairment of trading properties
Profit on disposal of investment properties
Trading property revenue and cost of sales
Loss on disposal of listed equity investments
Gain on revaluation of listed equity investments
Debt termination costs
Fair value (gain)/loss on derivatives
EPRA earnings for the year
Share-based payments
Hudson Quarter development loan interest
Adjusted profit after tax for the year
Tax excluding deferred tax on EPRA adjustments and capital gain charged
Adjusted profit before tax for the year
EPRA and adjusted earnings per ordinary share
EPRA Basic
EPRA Diluted
Adjusted EPS
2022
£’000
24,548
(8,222)
–
(4,946)
(3,800)
80
–
63
(329)
7,394
162
189
7,745
67
7,812
16.0p
16.0p
16.9p
2021
£’000
(5,533)
14,750
(763)
(905)
–
–
(709)
140
265
7,245
300
–
7,545
1
7,546
15.7p
15.7p
16.4p
7. NET ASSET VALUE PER SHARE
The Group has adopted the new EPRA NAV measures which came into effect for accounting periods starting 1 January 2020. EPRA
issued new best practice recommendations (BPR) for financial guidelines on its definitions of NAV measures. The new NAV measures
as outlined in the BPR are EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV). The
Group has adopted these new guidelines and applies them in the 31 March 2022 Annual Report.
The Group considered EPRA Net Tangible Assets (NTA) to be the most relevant NAV measure for the Group and we are now reporting
this as our primary NAV measure, replacing our previously reported EPRA NAV and EPRA NNNAV per share metrics. EPRA NTA excludes
the intangible assets and the cumulative fair value adjustments for debt-related derivatives which are unlikely to be realised.
As at 31 March 2022
Net assets attributable to Shareholders
Include:
Fair value adjustment of trading properties
Real estate transfer tax
Fair value of fixed interest rate debt
Exclude:
Fair value of derivatives value
Deferred tax on latent capital gains and capital allowances
EPRA NAV
Number of ordinary shares issued for diluted and EPRA net assets per share
EPRA NAV per share
The adjustments made to get to the EPRA NAV measures above are as follows:
EPRA NTA
£’000
177,204
EPRA NRV
£’000
177,204
ERPA NDV
£’000
177,204
3,188
–
–
3,188
17,049
–
3,188
–
413
47
143
180,582
46,325,236
390p
47
143
197,631
46,325,236
427p
–
–
180,805
46,325,236
390p
• Fair value adjustment of trading properties: Difference between development property held on the balance sheet at cost and fair
value of that development property.
• Real estate transfer tax: Gross value of property portfolio as provided in the Valuation Certificate (i.e. the value prior to any deduction
of purchasers’ costs).
130
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 7. NET ASSET VALUE PER SHARE CONTINUED
• Fair value of fixed interest rate debt: Difference between any financial liability and asset held on the balance sheet of the Group and
the fair value of that financial liability or asset.
• Fair value of derivatives: Exclude fair value financial instruments that are used for hedging purposes where the company has the
intention of keeping the hedge position until the end of the contractual duration.
• Deferred tax on latent capital gains and capital allowances: Exclude the deferred tax as per IFRS balance sheet in respect of the
difference between the fair value and the tax book value of investment property, development property held for investment,
intangible assets, or other non-current investments as this would only become payable if the assets were sold.
As at 31 March 2021
EPRA NTA
£’000
EPRA NRV
£’000
EPRA NDV
£’000
157,831
157,831
157,831
2,247
–
–
2,247
18,365
–
2,247
–
(59)
1,029
228
161,335
46,154,624
350p
1,029
228
179,700
46,154,624
389p
–
–
160,019
46,154,624
347p
2022
No of shares
2021
No of shares
46,288,470
36,766
46,325,236
46,069,690
84,934
46,154,624
383p
383p
390p
2022
£’000
1,504
1,389
2,893
1,382
1,152
–
–
2,534
–
–
–
–
5,427
343p
342p
350p
2021
£’000
–
–
–
–
–
1,152
1,152
2,304
1,151
–
–
1,151
3,455
Dividend
per share
3.25
3.00
6.25
3.00
2.50
2.50
2.50
10.50
2.50
4.75
4.75
12.00
Net assets attributable to Shareholders
Include:
Fair value adjustment of trading properties
Real estate transfer tax
Fair value of fixed interest rate debt
Exclude:
Fair value of derivatives value
Deferred tax on latent capital gains and capital allowances
EPRA NAV
Number of ordinary shares issued for diluted and EPRA net assets per share
EPRA NAV per share
Number of ordinary shares issued at the end of the year (excluding treasury shares)
Dilutive effect of share options
Number of ordinary shares issued for diluted and EPRA net assets per share
Net assets per ordinary share
Basic
Diluted
EPRA NTA
8. DIVIDENDS
2022
Interim dividend
Interim dividend
2021
Final dividend
Interim dividend
Interim dividend
Interim dividend
2020
Final dividend
Interim dividend
Interim dividend
Payment date
31 December 2021
15 October 2021
05 August 2021
09 April 2021
31 December 2020
16 October 2020
14 August 2020
27 December 2019
18 October 2019
Dividends reported in the Group Statement of Changes in Equity
131
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
8. DIVIDENDS CONTINUED
Proposed Dividends
July 2022 final dividend in respect of year end 31 March 2022: 3.75p (2021 final dividend: 3.00p)
April 2022 interim dividend in respect of year end 31 March 2022: 3.25p (2021 interim dividend: 2.50p)
2022
£’000
1,736
1,504
3,240
2021
£’000
1,382
1,152
2,534
Proposed final dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability
as at 31 March 2022.
9. PROPERTY PORTFOLIO
At 1 April 2020
Additions – refurbishments
Capital expenditure on assets under construction
Loss on revaluation of investment properties
Disposals
At 31 March 2021
Additions – refurbishments
Additions - new properties
Gain on revaluation of investment properties
Disposals
At 31 March 2022
At 1 April 2020
Additions – refurbishments
Capital expenditure on developments
Additions – trading property
(Loss)/gain on revaluation of properties
Disposals
At 31 March 2021
Additions – refurbishments
Additions - new properties
Additions – trading property
Transfer from investment property under construction
Gain on revaluation of properties
Disposals
At 31 March 2022
Freehold
investment
properties
£’000
Leasehold
investment
properties
£’000
Total
investment
properties
£’000
230,396
2,273
4,061
(13,614)
(3,975)
219,141
2,351
10,022
6,886
(22,290)
216,110
18,303
(44)
–
(1,136)
(410)
16,713
2,543
–
1,336
(3,985)
16,607
Standing
investment
properties
£’000
Investment
properties
under
construction
£’000
Total
investment
properties
£’000
Trading
properties
£’000
240,927
2,229
–
–
(14,867)
(4,385)
223,904
4,894
10,022
–
11,950
8,222
(26,275)
232,717
7,772
–
4,061
–
117
–
11,950
–
–
–
(11,950)
–
–
–
248,699
2,229
4,061
–
(14,750)
(4,385)
235,854
4,894
10,022
–
–
8,222
(26,275)
232,717
27,557
–
–
14,399
763
–
42,719
–
–
1,182
–
–
(23,614)
20,287
248,699
2,229
4,061
(14,750)
(4,385)
235,854
4,894
10,022
8,222
(26,275)
232,717
Total
property
portfolio
£’000
276,256
2,229
4,061
14,399
(13,987)
(4,385)
278,573
4,894
10,022
1,182
–
8,222
(49,889)
253,004
The property portfolio has been independently valued at fair value. The valuations have been prepared in accordance with the RICS
Valuation – Global Standards July 2017 (“the Red Book”) and incorporate the recommendations of the International Valuation Standards
and the RICS valuation – Professional Standards UK January 2014 (Revised April 2015) which are consistent with the principles set out in
IFRS 13.
The valuer in forming its opinion makes a series of assumptions, which are typically market related, such as net initial yields and expected
rental values, and are based on the valuer’s professional judgement. The valuer has sufficient current local and national knowledge of the
particular property markets involved and has the skills and understanding to undertake the valuations competently.
132
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 9. PROPERTY PORTFOLIO CONTINUED
In addition to the loss on revaluation of investment properties included in the table above, realised gains of £4,946,000 (2021: £905,000)
relating to investment properties disposed of during the year were recognised in profit or loss.
The Group has developed a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of commercial
units which the Group holds for leasing. During the development the commercial element of the scheme was classified as investment
properties under construction. As a result of achieving practical completion in April 2021, the commercial element of the scheme is now
classified as investment properties.
For investment properties under construction and trading properties, £51,674 (2021: £859,543) of borrowing costs have been capitalised
in the year including 100% of the interest due on the development loan.
A reconciliation of the valuations carried out by the independent valuers to the carrying values shown in the Statement of Financial
Position was as follows:
Cushman & Wakefield LLP (property portfolio)
Adjustment in respect of minimum payment under head leases
Less trading properties at lower of cost and net realisable value
Less lease incentive balance included in accrued income
Less fair value uplift on trading properties
Carrying value of investment properties
2022
£’000
259,040
1,078
(20,287)
(3,926)
(3,188)
232,717
2021
£’000
282,820
1,804
(42,719)
(3,804)
(2,247)
235,854
The valuations of all investment property held by the Group is classified as Level 3 in the IFRS 13 fair value hierarchy as they are based on
unobservable inputs. There have been no transfers between levels of the fair value hierarchy during the year.
Valuation process – investment properties
The valuation reports produced by the independent valuers are based on information provided by the Group such as current rents, terms
and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group’s financial and
property management systems and is subject to the Group’s overall control environment.
In addition, the valuation reports are based on assumptions and valuation models used by the independent valuers. The assumptions are
typically market related, such as yields and discount rates, and are based on their professional judgement and market observations. Each
property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.
The Executive Director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the
individual property valuation changes from the prior year valuation report and holds discussions with the independent valuers.
When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part of its
overall responsibilities.
The key assumptions made in the valuation of the Group’s investment properties are:
• The amount and timing of future income streams;
• Anticipated maintenance costs and other landlord’s liabilities;
• An appropriate yield; and
• For investment properties under construction: gross development value, estimated cost to complete and an appropriate developer’s
margin.
Valuation technique – standing investment properties
The valuations reflect the tenancy data supplied by the Group along with associated revenue costs and capital expenditure. The fair value
of the investment portfolio has been derived from capitalising the future estimated net income receipts at capitalisation rates reflected by
recent arm’s length sales transactions.
133
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
9. PROPERTY PORTFOLIO CONTINUED
31 March 2022
Fair value of property portfolio
Area (sq ft)
Gross Estimated Rental Value
Net Initial Yield
Minimum
Maximum
Weighted average
Reversionary Yield
Minimum
Maximum
Weighted average
Equivalent Yield
Minimum
Maximum
Weighted average
Office
Industrial
Significant unobservable inputs
Leisure
Other
Total
£122,125,000 £43,345,000 £36,990,000 £56,580,000 £259,040,000
1,452,932
£2,586,276 £19,418,183
633,591
£10,952,762
345,586
£2,608,500
303,993
£3,270,645
169,762
(5.1%)
9.6%
4.7%
4.5%
11.3%
8.0%
4.5%
8.8%
7.6%
3.5%
5.6%
4.5%
4.6%
6.3%
5.5%
4.5%
5.9%
5.4%
7.8%
9.2%
8.4%
7.3%
9.1%
8.2%
8.4%
9.8%
9.6%
3.5%
11.1%
7.2%
3.4%
10.4%
7.2%
3.4%
9.9%
7.2%
(5.1%)
11.1%
5.6%
3.4%
11.3%
7.5%
3.4%
9.9%
7.4%
The “other” sector includes Residential, Retail and Retail Warehousing sectors.
Negative net initial yields arise where properties are vacant or partially vacant and void costs exceed rental income.
31 March 2021
Fair value of property portfolio
Area (sq ft)
Gross Estimated Rental Value
Net Initial Yield
Minimum
Maximum
Weighted average
Reversionary Yield
Minimum
Maximum
Weighted average
Equivalent Yield
Minimum
Maximum
Weighted average
Office
Industrial
Significant unobservable inputs
Leisure
Other
Total
£116,280,000
669,711
£10,813,496
£40,740,000
409,593
£2,881,140
£35,455,000
306,970
£3,226,035
£90,345,000 £282,820,000
1,603,794
£20,563,382
217,520
£3,642,711
(5.1%)
10.0%
5.4%
6.5%
10.8%
8.1%
6.1%
8.1%
7.8%
1.4%
7.9%
5.4%
5.1%
7.9%
4.7%
5.2%
7.4%
6.3%
7.4%
8.3%
7.8%
7.4%
8.6%
7.9%
8.3%
9.5%
9.2%
4.4%
18.5%
7.0%
4.5%
24.3%
6.5%
5.0%
14.1%
6.5%
(5.1%)
18.5%
5.6%
4.5%
24.3%
7.3%
5.0%
14.1%
7.6%
The following descriptions and definitions relate to valuation techniques and key unobservable inputs made in determining fair values:
Market comparable method
Under the market comparable method (or market comparable approach), a property’s fair value is estimated based on comparable
transactions in the market.
Unobservable input: estimated rental value
The rent at which space could be let in the market conditions prevailing at the date of valuation (range: £23,640–£1,874,413 per annum).
Rental values are dependent on a number of variables in relation to the Group’s property. These include: size, location, tenant, covenant
strength and terms of the lease.
134
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 9. PROPERTY PORTFOLIO CONTINUED
Unobservable input: net initial yield
The net initial yield is defined as the initial gross income as a percentage of the market value (or purchase price as appropriate) plus
standard costs of purchase.
Sensitivities of measurement of significant unobservable inputs
As set out within significant accounting estimates and judgements above, the Group’s property Portfolio Valuation is open to judgements
inherently subjective by nature.
Unobservable input
Gross Estimated Rental Value
Net Initial Yield
Reversionary Yield
Equivalent Yield
Impact on fair value measurement of
significant increase in input
Impact on fair value measurement of
significant decrease in input
Increase
Decrease
Decrease
Decrease
Decrease
Increase
Increase
Increase
-5% in passing
rent (£m)
+5% in passing
rent (£m)
+0.25% in net
initial yield (£m)
-0.25% in net
initial yield (£m)
(Decrease)/increase in the fair value of investment
properties as at 31 March 2022
(Decrease)/increase in the fair value of investment
properties as at 31 March 2021
Valuation technique: properties under construction
(10.76)
(10.87)
10.76
10.87
(9.74)
(11.29)
12.36
12.35
Development assets are valued using the gross development value of the asset less any costs still payable in order to complete, and an
appropriate developer’s margin.
10. TRADING PROPERTY
At 1 April 2020
Costs capitalised
Reversal of impairment of trading properties
At 1 April 2021
Costs capitalised
Disposal of trading properties
At 31 March 2022
Total
£’000
27,557
14,399
763
42,719
1,182
(23,614)
20,287
The Group developed a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of residential units which
the Group is in the process of selling. As a result, the residential element of the scheme is classified as trading property.
11. LISTED EQUITY INVESTMENTS
At 1 April 2020
Gain on revaluation of equity investment shown in Consolidated Statement of Comprehensive Income
At 1 April 2021
Disposal of equity investment
At 31 March 2022
Total
£’000
2,540
709
3,249
(3,249)
–
135
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
12. PROPERTY, PLANT AND EQUIPMENT
At 1 April 2020
Additions
At 1 April 2021
Additions
At 31 March 2022
Depreciation
At 1 April 2020
Provided during the year
At 1 April 2021
Provided during the year
At 31 March 2022
Net book value at 31 March 2022
Net book value at 31 March 2021
13. TRADE AND OTHER RECEIVABLES
Current
Gross amounts receivable from tenants
Less: expected credit loss provision
Net amount receivable from tenants
Other taxes
Other debtors
Accrued income
Prepayments
IT, fixtures
and fittings
£’000
Right of use
asset
£’000
258
16
274
22
296
157
46
203
48
251
45
71
2022
£’000
2,624
(980)
1,644
156
1,022
3,926
664
7,412
461
–
461
–
461
148
148
296
148
444
17
165
2021
£’000
4,115
(1,340)
2,775
143
2,461
3,804
581
9,764
Accrued income amounting to £3,926,000 (2021: £3,804,000) relates to rents recognised in advance of receipt as a result of spreading
the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts over the
expected terms of their respective leases.
The carrying value of trade and other receivables classified at amortised cost approximates fair value.
As at 31 March 2022 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:
Expected loss rate
Gross carrying amount
Loss provision
Changes to credit risk management
More than
30 days
past due
£’000
More than
60 days
past due
£’000
More than
90 days
past due
£’000
82%
12
10
0%
–
–
90%
944
846
Current
£’000
7%
1,668
124
Total
£’000
2,624
980
The impact of Covid-19 has given rise to higher estimated probabilities of default for some of the Group’s tenants. As a result,
impairment calculations have been carried out on trade receivables using the IFRS 9 simplified approach, using 12 months of historic
rental payment information, and adjusting risk profiles based on forward-looking information. In addition, the Group has reviewed its
register of tenants at higher risk, particularly in the leisure and retail sectors, those in administration or CVA and the top 50 tenants by size
with the remaining tenants considered on a sector by sector basis.
Concentration of credit risk
The credit risk in respect of trade receivables is not concentrated as the Group operates in many different sectors and locations around
the UK, and has a wide range of tenants from a broad spectrum of business sectors. The Group predominantly operates in the office and
industrial sectors, which has largely remained unaffected by Covid-19. 48% of the ECL provision relates to tenants in the leisure and retail
sectors, and 3% of the ECL provision relates to tenants in administration or CVA.
136
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 13. TRADE AND OTHER RECEIVABLES CONTINUED
How forward looking information was incorporated
In calculating the ECL provision, the Group used forward looking information when assessing the risk profiles of each tenant, most
notably around the assessment over the likelihood of tenants having the ability to pay rent as demanded, as well as the likelihood of
rent deferrals and rent frees being offered to tenants. The Group considered factors such as the vaccine success on the economy, whilst
remaining cautious of potential new economic headwinds.
Key sources of estimation uncertainty
The Group’s risk profile rates form a key part when calculating the ECL provision. Default rates were applied to each tenant based on the
ageing of the outstanding receivable. Tenants were classified as either low (default range of 0.5% - 8%), medium (default range of 20% -
50%), high (default range of 65% - 80%), or extremely high risk (set default range of 100%), with default rates applied to each risk profile.
These rates have been calculated by using historic and forward-looking information and is inherently subjective.
A sensitivity analysis performed to determine the impact on the Group Statement of Comprehensive Income from a 10% increase in each
of the risk profile rates would result in a decrease in profit by £305,084.
The Group does not hold any material collateral as security.
As at 31 March 2021 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:
Expected loss rate
Gross carrying amount
Loss provision
Movement in the expected credit loss provision was as follows:
Current
£’000
12%
2,364
278
Brought forward
Receivables written off during the year as uncollectable
Provisions released
Provisions increased
14. CASH AND CASH EQUIVALENTS
More than 30
days
past due
£’000
More than 60
days
past due
£’000
More than 90
days
past due
£’000
3%
168
5
7%
45
3
69%
1,538
1,054
2022
£’000
1,340
(158)
(276)
74
980
Total
£’000
4,115
1,340
2021
£’000
391
–
–
949
1,340
All of the Group’s cash and cash equivalents at 31 March 2022 and 31 March 2021 are in sterling and held at floating interest rates.
Cash and cash equivalents – unrestricted
The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.
2022
£’000
28,143
2021
£’000
9,417
137
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
15. TRADE AND OTHER PAYABLES
Trade payables
Other taxes
Other payables
Deferred rental income
Accruals
2022
£’000
604
1,167
1,136
3,368
2,637
8,912
2021
£’000
1,143
2,100
2,607
3,347
3,711
12,908
The Directors consider that the carrying amount of trade and other payables measured at amortised cost approximates to their
fair value.
Included within other payables are deposits on pre sales of apartments at Hudson Quarter, York totalling £Nil (2021: £924k).
These amounts will be recognised as revenue when the title is transferred to the buyer.
16. DERIVATIVES
The Group adopts a policy of entering into derivative financial instruments with banks to provide an economic hedge to its interest rate
risks and ensure its exposure to interest rate fluctuations is mitigated.
The contract rate is the fixed rate the Group is paying for its interest rate swaps.
The valuation rate is the variable SONIA and bank base rate the banks are paying for the interest rate swaps. Details of the interest rate
swaps the Group has entered can be found in the table below.
The valuations of all derivatives held by the Group are classified as Level 2 in the IFRS 13 fair value hierarchy as they are based on
observable inputs. There have been no transfers between levels of the fair value hierarchy during the year.
Further details on interest rate risks are included in note 26.
Barclays Bank plc
Santander plc
17. BORROWINGS
Current liabilities
Bank loans
Unamortised lending costs
Non-current liabilities
Bank loans
Unamortised lending costs
Total borrowings
Bank loans
Unamortised lending costs
Bank
Notional
principal
33,847,900
18,591,549
52,439,449
Expiry
date
Contract rate
%
Valuation
rate %
25/01/2023
03/08/2022
1.3420
1.3730
0.1862
0.1326
2022
Fair value
£’000
3
(50)
(47)
2021
Fair value
£’000
(717)
(312)
(1,029)
2022
£’000
32,813
(64)
32,749
68,940
(452)
68,488
101,753
(516)
101,237
2021
£’000
22,075
(222)
21,853
106,238
(806)
105,432
128,313
(1,028)
127,285
138
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 17. BORROWINGS CONTINUED
The maturity profile of the Group’s debt was as follows:
Within one year
From one to two years
From two to five years
After five years
Facility and arrangement fees
As at 31 March 2022
2022
£’000
32,813
1,218
67,722
–
101,753
2021
£’000
22,075
32,813
65,750
7,675
128,313
Secured Borrowings
Santander Bank plc
Lloyds Bank plc
National Westminster Bank plc
Barclays
Scottish Widows
All in cost
Maturity
date
3.71% August 2022
2.64% March 2023
2.79% August 2024
3.41% June 2024
July 2026
2.90%
Total Facility
£’000
24,750
6,845
40,000
29,168
8,947
109,710
Unused loan
facilities
£’000
–
–
(7,957)
–
–
(7,957)
Facility
drawn
£’000
24,750
6,845
32,043
29,168
8,947
101,753
Unamortised
facility fees
£’000
(29)
(35)
(230)
(128)
(94)
(516)
Loan Balance
£’000
24,721
6,810
31,813
29,040
8,853
101,237
As at 31 March 2021
Secured Borrowings
All in cost Maturity date
Santander Bank plc
Lloyds Bank plc
National Westminster Bank plc
Barclays
Barclays
Scottish Widows
3.55% August 2022
2.04% March 2023
2.19% August 2024
3.17%
June 2024
3.34% January 2022
July 2026
2.90%
Total Facility
£’000
Unused loan
facilities
£’000
Facility drawn
£’000
Unamortised
facility fees
£’000
Loan Balance
£’000
25,250
6,845
40,000
37,976
22,298
9,264
141,633
–
–
(11,380)
–
(1,940)
–
(13,320)
25,250
6,845
28,620
37,976
20,358
9,264
128,313
(108)
(63)
(329)
(191)
(222)
(115)
(1,028)
25,142
6,782
28,291
37,785
20,136
9,149
127,285
Investment properties with a carrying value of £218,780,000 (2021: £234,613,000) are subject to a first charge to secure the Group’s bank
loans amounting to £101,753,000 (2021: £128,313,000). Trading properties with a carrying value of £20,286,000 (2021: £42,719,000) are
no longer subject to a first charge to secure the Group’s bank loans following the repayment of the Barclays loan in November 2021.
The Group has unused loan facilities amounting to £7,957,000 (2021: £13,320,000). A facility fee is charged on this balance at a rate of
1.05% p.a. and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited,
Palace Capital (Properties) Limited and Palace Capital (Leeds) Limited as part of the NatWest loan.
The Group constantly monitors its approach to managing interest rate risk. The Group has fixed £61,386,000 (2021: £62,580,000) of its
debt in order to provide surety of its interest cost and to mitigate interest rate risk. The remaining debt in place at year end is subject to
floating rate in order to take advantage of the historically low interest rate environment.
The Group has a loan with Scottish Widows for £8,947,000 (2021: £9,264,000) which is fully fixed at a rate of 2.9%.
The Group has a loan with Barclays Bank plc for £29,168,000 (2021: £37,976,000), of which £33,848,000 (2021: £34,348,000) is fixed
using an interest rate swap (see note 16). The floating rate portion of the loan is charged at a margin of 1.95% plus SONIA.
The Group has a loan with Santander plc for £24,750,000 (2021: £25,250,000), of which £18,592,000 (2021: £18,967,000) is fixed using an
interest rate swap (see note 16). The floating rate portion of the loan is charged at a margin of 2.5% plus SONIA.
The Group has a loan with Lloyds Bank plc for £6,845,000 (2021: £6,845,000) which is fully charged at a floating rate margin of 1.95%
plus SONIA.
The Group has a loan with National Westminster Bank plc for £32,043,000 (2021: £28,620,000) which is fully charged at a floating rate
margin of 2.1% plus SONIA.
139
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
17. BORROWINGS CONTINUED
The fair value of borrowings held at amortised cost at 31 March 2022 was £101,650,000 (2021: £127,342,000).
The Group’s bank loans are subject to various covenants including Loan to Value, Interest Cover and Debt Service Cover requirements.
During the year, the Group met all of its covenants, with a waiver obtained in April 2021 for the Scottish Widows facility.
18. GEARING AND LOAN TO VALUE RATIO
The calculation of gearing is based on the following calculations of net assets and net debt:
2022
£’000
180,582
101,237
1,078
(28,143)
74,172
41%
2022
£’000
235,565
23,475
259,040
101,753
(28,143)
73,610
28%
2021
£’000
161,335
127,285
1,804
(9,417)
119,672
74%
2021
£’000
240,101
42,719
282,820
128,313
(9,417)
118,896
42%
Bank
borrowings
£’000
Total
£’000
119,356
119,356
18,916
(11,363)
(282)
300
218
140
127,285
11,472
(38,033)
(11)
18,916
(11,363)
(282)
300
218
140
127,285
11,472
(38,033)
(11)
305
219
101,237
305
219
101,237
EPRA net asset value (note 7)
Borrowings (net of unamortised issue costs)
Lease liabilities for investment properties
Cash and cash equivalents
Net debt
NAV gearing
The calculation of bank loan to property value is calculated as follows:
Fair value of investment properties
Fair value of trading properties
Fair value of property portfolio
Borrowings
Cash at bank
Net bank borrowings
Loan to value ratio
19. RECONCILIATION OF LIABILITIES TO CASH FLOWS FROM
FINANCING ACTIVITIES
Balance at 1 April 2020
Cash flows from financing activities:
Bank borrowings drawn
Bank borrowings repaid
Loan arrangement fees paid
Non-cash movements:
Amortisation of loan arrangement fees
Capitalised loan arrangement fees
Debt termination costs
Balance at 1 April 2021
Cash flows from financing activities:
Bank borrowings drawn
Bank borrowings repaid
Loan arrangement fees paid
Non-cash movements:
Amortisation of loan arrangement fees
Capitalised loan arrangement fees
Balance at 31 March 2022
140
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 20. LEASES
Operating lease receipts in respect of rents on investment properties are receivable as follows:
Within one year
From one to two years
From two to three years
From three to four years
From four to five years
From five to 25 years
Lease liabilities are classified as follows:
Lease liabilities for investment properties
Lease liabilities for right of use asset
2022
£’000
15,765
15,109
13,000
12,357
10,787
49,821
116,839
2022
£’000
1,078
–
1,078
2021
£’000
16,170
14,730
12,637
10,502
9,535
47,005
110,579
2021
£’000
1,804
154
1,958
Lease obligations in respect of rents payable on leasehold properties were payable as follows:
Within one year
From one to two years
From two to five years
From five to 25 years
After 25 years
2022
Interest
£’000
(54)
(54)
(162)
(1,073)
(3,743)
(5,086)
Present value
of lease
payments
£’000
2021
Present value
of lease
payments
£’000
–
–
–
8
1,070
1,078
2
3
10
47
1,742
1,804
Lease
payments
£’000
54
54
162
1,081
4,813
6,164
Lease obligations in respect of rents payable on right of use assets were payable as follows:
Within one year
The net carrying amount of the leasehold properties is shown in note 9.
2022
Interest
£’000
–
Present value
of lease
payments
£’000
2021
Present value
of lease
payments
£’000
–
154
Lease
payments
£’000
–
141
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
20. LEASES CONTINUED
The Group has over 180 leases granted to its tenants. These vary depending on the individual tenant and the respective property and
demise and vary considerably from short-term leases of less than one year to longer-term leases of over 10 years.
A number of these leases contain rent free periods. Standard lease provisions include service charge payments and recovery of other
direct costs. All investment properties in the Group’s portfolio generated rental income during both the current and prior periods, with
the exception of Hudson Quarter, York held in Palace Capital (Developments) Limited which commenced development in February 2018
and was completed in April 2021. Direct operating costs of £Nil (2021: £Nil) were incurred on the property.
21. SHARE CAPITAL
Authorised, issued and fully paid share capital is as follows:
46,388,515 ordinary shares of 10p each (2021: 46,388,515)
Reconciliation of movement in ordinary share capital
At start of year
Issued in the year
At end of year
Movement in ordinary authorised share capital
As at 31 March 2020, 31 March 2021 and 31 March 2022
Movement in treasury shares
As at 31 March 2020 and 31 March 2021
Shares transferred to EBT
As at 31 March 2022
Total number of shares excluding the number held in treasury at 31 March
2022
Year ended 31 March 2022
On 14 July 2021, 200,000 shares were transferred into the employee benefit trust.
Prior year figures included shares and transfers in the employee benefit trust.
2022
£’000
4,639
4,639
2022
£’000
4,639
–
4,639
2021
£’000
4,639
4,639
2021
£’000
4,639
–
4,639
Price per
share pence
Number of
ordinary
shares issued
Total number
of shares
–
–
46,388,515
Number of
ordinary
shares issued
14 July 2021
(200,000)
Total number
of shares
299,587
99,587
46,288,928
142
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 21. SHARE CAPITAL CONTINUED
Shares held in Employee Benefit Trust
Authorised, issued and fully paid share capital is as follows:
Brought forward
Transferred under scheme of arrangement
Shares exercised under deferred bonus share scheme
Shares exercised under employee LTIP scheme
Shares purchased by EBT
At end of year
Share options:
Reconciliation of movement in outstanding share options
At start of year
Issued in the year
Exercised in the year
Lapsed in the year
Deferred bonus share options issued
Deferred bonus share options exercised
At end of year
2022
No. of
options
19,238
200,000
(90,049)
(134,814)
6,083
458
2022
No. of
options
1,193,984
402,717
(134,814)
(329,778)
36,766
(90,049)
1,078,826
2021
No. of
options
52,420
–
(33,182)
–
–
19,238
2021
No. of
options
770,223
573,456
–
(201,447)
84,934
(33,182)
1,193,984
As at 31 March 2022, the Company had the following outstanding unexpired options:
Description of unexpired share options
Employee benefit plan
Deferred bonus share scheme issued
Total (note 22)
Exercisable
Not exercisable
2022
2021
No. of
options
1,042,060
36,766
1,078,826
–
1,078,826
Weighted
average
option price
0p
0p
0p
0p
0p
No. of
options
1,114,232
84,934
1,199,166
–
1,199,166
Weighted
average
option price
0p
0p
0p
0p
0p
The weighted average remaining contractual life of share options at 31 March 2022 is 1.7 years (2021: 1.7 years).
143
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
22. SHARE-BASED PAYMENTS
Employee benefit plan
The following table illustrates the number and weighted average exercise prices of, and movements in, share options during the period:
Number of
options
Exercise
price
Average
share price at
date of
exercise
Grant
date
Vesting
date
Outstanding at 31 March 2020
Issued during the year (LTIP 2020)
Deferred bonus share options issued
Deferred bonus share options exercised
Lapsed during year (LTIP 2017)
Lapsed during year (LTIP 2019)
Outstanding at 31 March 2021
Exercised during the year (LTIP 2018)
Issued during the year (LTIP 2021)
Deferred bonus share options issued
Deferred bonus share options exercised
Lapsed during year (LTIP 2018)
Lapsed during year (LTIP 2019)
Lapsed during year (LTIP 2020)
Outstanding at 31 March 2022
LTIP 2019
770,223
573,456
84,934
(33,182)
(187,956)
(13,491)
1,193,984
(134,814)
402,717
36,766
(90,049)
(114,405)
(70,826)
(144,547)
1,078,826
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
14 October 2020
14 July 2020
25 June 2019
14 October 2023
14 July 2021
25 June 2020
184p
254p
247p
253p
254p
13 July 2018
16 November 2021
15 June 2021
14 July 2020
13 July 2021
16 November 2024
15 June 2022
14 July 2021
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. The
options are subject to a two-year holding period following vesting. Half the options will be awarded based on the first target and half
based on the achievement of the second.
Total property return growth is based on the increase in the total property return of the Company compared with an increase in the MSCI
IPD UK Quarterly Index (PV growth) as at 31 March 2019. This target will measure the annualised growth in total property return over the
three-year period ending 31 March 2022 (PV performance period), and comparing this with the annualised total property return growth of
the MSCI IPD UK Quarterly Index.
Total Shareholder return (TSR) measures the total Shareholder return (price rise plus dividends) over the period from 25 June 2019 to
24 June 2022. The base price is £2.85 per share which was the market price at the grant date.
Annualised TSR over the
TSR performance period
<5%
Equal to 5%
Between 5% and 9%
Equal to 9%
LTIP 2020
Vesting %
PV growth over the PV performance period
Vesting %
0
20
20–100
100
<0.5%
Equal to 0.5%
Between 0.5% and 2.5%
Equal to 2.5%
0
20
20–100
100
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. The
options are subject to a two-year holding period following vesting. Half the options will be awarded based on the first target and half
based on the achievement of the second.
Total property return growth is based on the increase in the total property return of the Company compared with an increase in the MSCI
IPD UK Quarterly Index (PV growth) as at 31 March 2020. This target will measure the annualised growth in total property return over the
three-year period ending 31 March 2023 (PV performance period), and comparing this with the annualised total property return growth of
the MSCI IPD UK Quarterly Index.
Total Shareholder return (TSR) measures the total Shareholder return (price rise plus dividends) over the period from 14 October 2020 to
13 October 2023. The base price is £1.88 per share which was the market price at the grant date.
144
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 22. SHARE-BASED PAYMENTS CONTINUED
Annualised TSR over the
TSR performance period
Vesting %
<5%
Equal to 5%
Between 5% and 9%
Equal to 9%
LTIP 2021
0
20
20–100
100
PV growth over the PV performance period
Vesting %
<0.5%
Equal to 0.5%
Between 0.5% and 2.5%
Equal to 2.5%
0
20
20–100
100
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. For
directors, the options are subject to a two-year holding period following vesting. Half the options will be awarded based on the first
target and half based on the achievement of the second.
Total property return growth is calculated as Total Property Return of the Company over the Performance Period beginning on
31 March 2021 and ending on 31 March 2024, using the Total Property Return (“TPR”) as calculated by MSCI for the Group as compared
with the TPR for the MSCI IPD Index (the “Comparator”) over the same period. The TPR for the Group and the Comparator will be its
percentage increase over the three-year Performance Period.
Total Shareholder return (TSR) measures the total Shareholder return (price rise plus dividends) over the period from 16 November 2021
to 15 November 2024. The percentage of the TSR metric will be adjusted downwards according to the Company’s share price
discount to net asset value at the time of vesting. Share Price Discount will be calculated with reference to the closing share price on
15 November 2024 and EPRA Net Tangible Assets as at 30 September 2024. The base price is £2.44 per share which was the market
price at the grant date.
Annualised TSR over the
TSR performance period
<5%
Equal to 5%
Between 5% and 9%
Equal to 9%
Vesting %
0
20
20–100
100
TPR equivalent total
over the performance period
Vesting %
<0.5%
Equal to 0.5%
Between 0.5% and 2.5%
Equal to 2.5%
0
20
20–100
100
The fair value of grants was measured at the grant date using a Black−Scholes pricing model for the TPR tranche and using a Monte
Carlo pricing model for the TSR tranche, taking into account the terms and conditions upon which the instruments were granted. The
services received and a liability to pay for those services are recognised over the expected vesting period. The main assumptions of both
the Black−Scholes and Monte Carlo pricing models are as follows:
Grant date
Share price
Exercise price
Term
Expected volatility
Expected dividend yield
Risk free rate
Time to vest (years)
Expected forfeiture p.a.
Fair value per option
Monte Carlo TSR
Tranche
Black-Scholes PV
Tranche
16 November 2021
£2.44
0p
5 years
38.03%
0.00%
0.59%
3.0
0%
£1.28
16 November 2021
£2.44
0p
5 years
38.03%
0.00%
0.59%
3.0
0%
£2.44
The expense recognised for employee share-based payment received during the period is shown in the following table:
LTIP 2017
LTIP 2018
LTIP 2019
LTIP 2020
LTIP 2021
Total expense arising from share-based payment transactions
145
2022
£’000
–
42
9
72
39
162
2021
£’000
13
86
135
66
–
300
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
23. RELATED PARTY TRANSACTIONS
Accounting services amounting to £Nil (2021: £3,062) have been provided to the Group by Stanley Davis Group Limited, a company
where Stanley Davis is a Director and Shareholder.
Charitable donations amounting to £Nil (2021: £4,000) have been made by the Group to Variety, the Children’s Charity, a charity where
Neil Sinclair is a Trustee.
Dividend payments made to Directors amounted to £262,265 (2021: £163,511) during the year. See note 4 on page 125 for further
details of key management remuneration.
24. CAPITAL COMMITMENTS
The obligation for capital expenditure relating to the construction, development or enhancement of investment properties entered into
by the Group amounted to £395,952 (2021: £5,575,818).
25. POST BALANCE SHEET EVENTS
On 1 April 2022, the Group completed the disposal of Warren House, Thame for a total consideration of £1.63m. The property was
charged against the loan facility with Barclays Bank plc and as a result, £506,758 of the total consideration was used to repay the Barclays
loan on 4 April 2022.
On 13 April 2022, the Group signed a 12 month extension with Lloyds in respect of the Liverpool facility to extend the termination date
to 7 March 2023.
On 14 April 2022, the Group completed the disposal of 2-4 High Road, Ickenham, for a total consideration of £875,000. The property
was charged against the loan facility with Barclays Bank plc and as a result, £432,234 of the total consideration was used to repay the
Barclays loan facility on 21 April 2022.
On 19 May 2022, the Group exchanged on the disposal of Winchester Street, Salisbury, for a total consideration of £2.01m. The property
is charged against the loan facility with NatWest plc, with £1.24m of the total consideration being used to repay the facility. Completion
of the sale is due to take place by 28 June 2022.
On 27 May 2022, the Group signed an amend and restate for the Santander UK facility. The amend and restate replaces the existing
Santander UK facility that was due to expire on 3 August 2022. The facility is charged at a margin of 2.2% plus SONIA.
Post year end, the Group have completed on a further four residential unit sales at Hudson Quarter for a total consideration of £1.7m.
26. FINANCIAL RISK MANAGEMENT
The Group’s principal financial liabilities are loans and borrowings. The main purpose of the Group’s loans and borrowings is to finance
the acquisition and development of the Group’s property portfolio. The Group has rent and other receivables, trade and other payables
and cash and short-term deposits that arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk and liquidity risk.
The Group’s senior management oversee the management of these risks, and the Board of Directors has overall responsibility for the
determination of the Group’s risk management objectives and policies and it sets policies that seek to reduce risk as far as possible
without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below:
The Group manages its capital structure, and makes adjustments to it, in the light of changes in economic conditions.
To maintain or adjust the capital structure, the Group may adjust the dividend payment to Shareholders, return capital to Shareholders
or issue new shares.
Capital risk management
The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to
£177,204,000 at 31 March 2022 (2021: £157,831,000). The Group’s capital management objectives are to safeguard the entity’s ability
to continue as a going concern, so that it can continue to provide returns for Shareholders and benefits for other stakeholders and to
provide an adequate return to Shareholders by pricing its services commensurately with the level of risk.
Within the subsidiaries of the Group, the business has covenanted to maintain a specified leverage ratio and a net interest expense
coverage ratio, all the terms of which have been adhered to during the year.
146
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 26. FINANCIAL RISK MANAGEMENT CONTINUED
Market risk
Market risk arises from the Group’s use of interest bearing, and tradable instruments. It is the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in interest rates (interest rate risk) or other market factors.
Interest rate risk
The interest rate exposure profile of the Group’s financial assets and liabilities as at 31 March 2022 and 31 March 2021 were:
As at 31 March 2022
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Interest rate swaps
Bank borrowings
Lease liabilities
As at 31 March 2021
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Equity investments
Interest rate swaps
Bank borrowings
Lease liabilities
Nil rate
assets and
liabilities
£’000
Floating rate
assets
£’000
Fixed rate
liability
£’000
Floating rate
liability
£’000
2,666
–
(4,377)
–
–
–
(1,711)
–
28,143
–
–
–
–
28,143
–
–
–
(47)
(61,386)
(1,078)
(62,511)
–
–
–
–
(39,851)
–
(39,851)
Nil rate assets
and liabilities
£’000
Floating rate
assets
£’000
Fixed rate
liability
£’000
Floating rate
liability
£’000
5,236
–
(7,461)
3,249
–
–
–
1,024
–
9,417
–
–
–
–
–
9,417
–
–
–
–
(1,029)
(62,579)
(1,958)
(65,566)
–
–
–
–
–
(64,706)
–
(64,706)
Total
£’000
2,666
28,143
(4,377)
(47)
(101,237)
(1,078)
(75,930)
Total
£’000
5,236
9,417
(7,461)
3,249
(1,029)
(127,285)
(1,958)
(119,831)
The Group’s interest rate risk arises from borrowings issued at floating interest rates. The Group’s interest rate risk is reviewed throughout
the year by the Directors. The Group manages its exposure to interest rate risk on borrowings through the use of interest rate derivatives
(see note 16). Interest rate swaps are used to mitigate the risk of an increase in interest rates but also to allow the Group to benefit
from a fall in interest rates. 60% of the Group’s interest rate exposure is fixed and the remainder held on a floating rate. The Group has
employed an external adviser when contracting hedging to advise on the structure of the hedging.
The Group is exposed to changes in interest rates as a result of the cash balances that it holds. The cash balances of the Group
at the year end were £28,143,000 (2021: £9,417,000). Interest receivable in the income statement would be affected by £281,000
(2021: £94,000) by a one percentage point change in floating interest rates on a full year basis.
The Group’s borrowings with Lloyds, Barclays, NatWest, Scottish Widows and Santander UK have all transitioned from the London
Interbank Offer Rate (LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark. There has been and is expected to be
negligible cost involved in the borrowing facility transition and the respective hedge instrument amendments.
The Group has loans amounting to £39,851,000 (2021: £64,706,000) which have interest payable at rates linked to the three-month
SONIA interest rates or bank base rates. A 1% increase in the SONIA or base rate will have the effect of increasing interest payable by
£399,000 (2021: £647,000).
The Group has interest rate swaps with a nominal value of £52,939,449 (2021: £53,315,036). If the SONIA or base rate was to increase
above the fixed contract rate then the Group will benefit from a fair value increase of the interest rate swap. If, however, the SONIA or
base rate was to decrease, then the Group would incur a decrease in the fair value of the interest rate swap.
147
FINANCIALS Notes to the Consolidated Financial Statements CONTINUED
26. FINANCIAL RISK MANAGEMENT CONTINUED
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2022
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2021
Change in interest rate
-1%
£’000
(326)
(859)
+1%
£’000
321
840
Upward movements in medium and long-term interest rates, associated with higher interest rate expectations, increase the value of the
Group’s interest rate swaps that provide protection against such moves. The converse is true for downward movements in the yield curve.
The Group is therefore relatively sensitive to changes in interest rates. The Directors regularly review the Group’s position with regard to
interest rates in order to minimise its risk.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The Group has its cash held on deposit with four large banks in the United Kingdom. At 31 March 2022 the cash balances of the Group
were £28,143,000 (2021: £9,417,000). The concentration of credit risk held with Barclays Bank plc, the largest of these banks, was
£20,281,000 (2021: £6,773,000). Credit risk on liquid funds is limited because the counterparty is a UK bank with a high credit rating
assigned by international credit rating agencies.
Credit risk also results from the possibility of a tenant in the Group’s property portfolio defaulting on a lease. The largest tenant by
contractual income amounts to 5.7% (2021: 5.6%) of the Group’s anticipated income. The Directors assess a tenant’s creditworthiness
prior to granting leases and employ professional firms of property management consultants to manage the portfolio to ensure that
tenants debts are collected promptly and the Directors in conjunction with the property managers take appropriate actions when
payment is not made on time.
The carrying amount of financial assets (excluding cash balances) recorded in the financial statements, net of any allowances for losses,
represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained. The carrying
amount of these assets at 31 March 2022 was £2,666,000 (2021: £5,236,000). The details of the provision for expected credit loss are
shown in note 13.
Liquidity risk management
The Group’s policy is to hold cash and obtain loan facilities at a level sufficient to ensure that the Group has available funds to meet
its medium-term capital and funding obligations, including organic growth and acquisition activities, and to meet certain unforeseen
obligations and opportunities. The Group holds cash to enable the Group to manage its liquidity risk.
The Group monitors its risk to a shortage of funds using a monthly cash management process. This process considers the maturity of
both the Group’s financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows
from operations.
The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of multiple sources of
funding including bank loans, term loans, loan notes, overdrafts and lease liabilities.
The tables below summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments:
On demand
£’000
0–1 years
£’000
1–2 years
£’000
2–5 years
£’000
> 5 years
£’000
Total
£’000
As at 31 March 2022
Interest bearing loans
Lease liabilities
Derivative financial instruments
Trade and other payables
As at 31 March 2021
Interest bearing loans
Lease liabilities
Derivative financial instruments
Trade and other payables
–
–
–
4,377
4,377
35,044
54
–
–
35,098
3,409
54
(3)
–
3,460
70,257
162
50
–
70,469
–
5,894
–
–
5,894
On demand
£’000
0–1 years
£’000
1–2 years
£’000
2–5 years
£,000
> 5 years
£’000
35,268
108
312
–
35,688
68,244
323
717
–
69,284
7,735
10,799
–
–
18,534
–
–
–
7,461
7,461
25,678
107
–
–
25,785
148
108,710
6,164
47
4,377
119,298
Total
£’000
136,925
11,337
1,029
7,461
156,752
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022Notes to the Consolidated Financial Statements Company Statement of Financial Position
AS AT 31 MARCH 2022
Fixed assets
Investments in subsidiaries
Listed equity investments
Property, plant and equipment
Current assets
Trade and other receivables
Cash at bank and in hand
Total assets
Current liabilities
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Equity
Called up share capital
Treasury shares
Merger reserve
Capital redemption reserve
Capital reduction reserve
Retained earnings
Equity – attributable to the owners of the Parent
Note
2
3
4
5
6
7
2022
£’000
122,864
–
43
122,907
42,576
479
43,055
165,962
2021
£’000
125,567
3,249
68
128,884
33,899
266
34,165
163,049
(28,953)
14,102
(19,159)
15,006
137,009
143,890
4,639
(717)
3,503
340
125,019
4,225
137,009
4,639
(1,288)
3,503
340
125,019
11,677
143,890
The Company’s loss after tax for the year was £1,706,000 (2021: £2,826,000).
The financial statements were approved by the Board of Directors and authorised for issue on 13 June 2022 and are signed on its behalf
by:
MATTHEW SIMPSON
Chief Financial Officer
149
FINANCIALS Company Statement of Changes in Equity
AS AT 31 MARCH 2022
At 31 March 2020
Total comprehensive income for the year
Transactions with Equity Holders
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends
Transfer to capital reduction reserve
account
At 31 March 2021
Total comprehensive income for the year
Transactions with Equity Holders
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends
At 31 March 2022
Share
Capital
£’000
4,639
–
Share
Premium
£’000
125,019
–
Treasury
Share
Reserve
£’000
(1,349)
–
Other
Reserves
£’000
3,843
–
–
–
–
–
–
4,639
–
–
–
–
–
4,639
–
–
–
–
(125,019)
–
–
–
–
–
–
–
–
61
–
–
–
(1,288)
–
–
571
–
–
(717)
–
–
–
–
–
3,843
–
–
–
–
–
3,843
Capital
Reduction
Reserve
£’000
–
–
–
–
–
–
125,019
125,019
–
–
–
–
–
125,019
Retained
Earnings
£’000
17,548
(2,826)
300
(61)
171
(3,455)
–
11,677
(1,706)
162
(571)
90
(5,427)
4,225
Total
Equity
£’000
149,700
(2,826)
300
–
171
(3,455)
–
143,890
(1,706)
162
–
90
(5,427)
137,009
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the
share issue.
Treasury shares represents the consideration paid for shares bought back from the market.
Other reserves comprise the merger reserve and the capital redemption reserve.
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by
the issue of shares in accordance with S612 of the Companies Act 2006.
The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.
The capital reduction reserve represents distributable profits generated as a result of the share premium reduction.
150
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Notes to the Company Financial Statements
ACCOUNTING POLICIES
Palace Capital plc is a company incorporated in England and Wales under the Companies Act. The address of the registered office is
given on the contents page and the nature of the Group’s operations and its principal activities are set out in the Strategic Report. The
financial statements of the Company have been prepared in accordance with FRS 102, the Financial Reporting Standard applicable in the
United Kingdom and the Republic of Ireland.
The preparation of financial statements in compliance with FRS 102 requires the use of certain critical accounting estimates. It also
requires Company’s management to exercise judgement in applying the Company’s accounting policies (as detailed below). The
Statement of Financial Position heading relating to the Company’s investments and property, plant and equipment has been amended
to “Fixed assets” from “Non-current assets” to be consistent with the Company’s presentation of its Statement of Financial Position in
accordance with the balance sheet formats of the Companies Act 2006. Assets are classified in accordance with the definitions of fixed
and current assets in the Companies Act instead of the presentation requirements of IAS 1 Presentation of Financial Statements
DIVIDENDS REVENUE
Revenue is recognised when the Company’s right to receive payment is established, which is generally when Shareholders of the paying
company approve the payment of the dividend.
VALUATION OF INVESTMENTS
Investments in subsidiaries are measured at cost less accumulated impairment. Where merger relief is applicable, the cost of the
investment in a subsidiary undertaking is measured at the nominal value of the shares issued together with the fair value of any additional
consideration paid.
LISTED EQUITY INVESTMENTS
Listed equity investments have been classified as being at fair value through profit and loss. Listed equity investments are subsequently
measured using Level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in the
profit and loss.
CURRENT TAXATION
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to
the tax authorities. The tax rates and the tax laws used to compute the amount are those that are enacted or substantively enacted, by
the balance sheet date.
DEFERRED TAXATION
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by
the balance sheet date.
Deferred tax balances are recognised in respect of timing differences that have originated but not reversed on the balance sheet date.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent
that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax balances are not recognised in respect of permanent differences between the fair value of assets acquired and the future
tax deductions available for them and the differences between the fair values of liabilities acquired and the amount that will be assessed
for tax.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive
income, in which case the deferred tax is also dealt with in other comprehensive income.
The Government announced a proposal in March 2021 for an increase in the corporation tax rate from 19% main rate in the tax year 2021
to 25% with effect from 1 April 2023. This was enacted by the Finance Act 2021 on 10 June 2021.
151
FINANCIALS Notes to the Company Financial Statements CONTINUED
TRADE AND OTHER RECEIVABLES
Trade and other receivables and intercompany receivables are recognised and carried at the original transaction value. A provision for
impairment is established where there is objective evidence that the Company will not be able to collect all amounts due according to
the original terms of the receivables concerned.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily
convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
FINANCIAL LIABILITIES AND EQUITY
Financial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual
arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that
evidences a residual interest in the assets of the Company after deducting all of its liabilities. The accounting policies adopted for specific
financial liabilities and equity instruments are set out below:
TRADE PAYABLES
Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest
rate method.
EQUITY INSTRUMENTS
Equity instruments issued by the Company are recorded at the fair value of proceeds received, net of direct issue costs.
PARENT COMPANY DISCLOSURE EXEMPTIONS
In preparing the separate financial statements of the Parent Company, advantage has been taken of the following disclosure exemptions
available in FRS 102:
• no cash flow statement has been presented for the Parent Company;
• disclosures in respect of the Parent Company’s financial instruments have not been presented as equivalent disclosures have been
provided in respect of the Group as a whole;
• disclosures in respect of the Parent Company’s share-based payment arrangements have not been presented as equivalent
disclosures have been provided in respect of the Group as a whole; and
• disclosure has been given for the aggregate remuneration of the key management personnel of the Parent Company as their
remuneration is included in the totals for the Group as a whole.
JUDGEMENTS IN APPLYING ACCOUNTING POLICIES AND KEY SOURCES OF
ESTIMATION UNCERTAINTY
Investments and loans to subsidiary undertakings (see note 3)
The most critical estimates, assumptions and judgements relate to the determination of carrying value of unlisted investments in the
Company’s subsidiary undertakings and the carrying value of the loans that the Company has made to them. The nature, facts and
circumstance of the investment or loan are taken into account in assessing whether there are any indications of impairment.
Provisions provided in the year reflect the reduction in net asset value of subsidiaries for the year ended 31 March 2022. Write-down of
investments reflect the winding up of subsidiaries within the year.
152
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 1. PROFIT FOR THE FINANCIAL PERIOD
The Company has taken advantage of section 408 of the Companies Act 2006 and consequently a profit and loss account for the
Company alone has not been presented.
2. INVESTMENTS IN SUBSIDIARIES
At 1 April 2020
Settlement of loans
At 1 April 2021
Write-down of investments
At 31 March 2021
Provision for impairment:
At 1 April 2020
Provided during the year
At 1 April 2021
Provided during the year
At 31 March 2022
Net book value at 31 March 2022
Net book value at 31 March 2021
Investments
in subsidiaries
£’000
Loans
to subsidiaries
£’000
Cost:
183,614
–
183,614
(2,658)
180,956
56,197
1,850
58,047
45
58,092
122,864
125,567
40
(40)
–
–
–
–
–
–
–
–
–
–
Total
£’000
183,654
(40)
183,614
(2,658)
180,956
56,197
1,850
58,047
45
58,092
122,864
125,567
The Group comprises a number of companies; all subsidiaries included within these financial statements are noted below:
Subsidiary undertaking:
Palace Capital (Leeds) Limited
Palace Capital (Northampton) Limited
Palace Capital (Properties) Limited
Palace Capital (Developments) Limited
Palace Capital (Halifax) Limited
Palace Capital (Manchester) Limited
Palace Capital (Liverpool) Limited
Palace Capital (Signal) Limited
Property Investment Holdings Limited
Palace Capital (Dartford) Limited
Palace Capital (Newcastle) Limited
Palace Capital (York) Limited
Associate Company:
HBP Services Limited*
Clubcourt Limited*
* Held indirectly
Class of share held
%
shareholding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
21.4
40
Principal activity
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Management
Property Investments
Property Management
Property Management
Property Management
The results of the associates are immaterial to the Group.
The registered addresses for the subsidiaries across the Group are consistent based on their country of incorporation and are as follows:
UK entities: 4th Floor, 25 Bury Street, St James's, London, SW1Y 6AL
On 22 March 2022 R.T. Warren (Investments) Limited was dissolved.
153
FINANCIALS
Notes to the Company Financial Statements CONTINUED
3. LISTED EQUITY INVESTMENTS
At 31 March 2020
Gain on revaluation of listed equity investment shown in statement of comprehensive income
At 31 March 2021
Disposal of listed equity investment
At 31 March 2022
4. PROPERTY, PLANT AND EQUIPMENT
At 31 March 2020
Additions
At 31 March 2021
Additions
At 31 March 2022
Depreciation
At 31 March 2020
Provided during the period
At 31 March 2021
Provided during the period
At 31 March 2022
Net book value at 31 March 2022
Net book value at 31 March 2021
5. TRADE AND OTHER RECEIVABLES
Amounts owed by subsidiary undertakings
Trade debtors
Other debtors
Accrued interest on amounts owed by subsidiary undertakings
Prepayments
Total
£’000
2,540
709
3,249
(3,249)
–
IT, fixtures
and fittings
£’000
253
16
269
22
291
157
44
201
47
248
43
68
2021
£’000
30,063
2,454
1,096
65
221
33,899
2022
£’000
36,374
5,607
44
309
242
42,576
Trade debtors represent amounts owed from subsidiary undertakings in relation to management charges.
All amounts that fall due for repayment within one year and are presented within current assets as required by the Companies Act. The
amounts owed by subsidiary undertakings are repayable on demand with no fixed repayment date, although it is noted that a significant
proportion of the amounts may not be sought for repayment within one year depending on activity in the subsidiary undertakings.
A loan amounting to £28,888,501 remains outstanding at 31 March 2022 (2021: £26,375,362) from Palace Capital (Developments)
Limited. No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £519,534 remains outstanding at 31 March 2022 (2021: £396,034) from Palace Capital (Leeds) Limited. Interest on
this loan is charged at a fixed rate of 5% per year. This loan is repayable on demand.
A loan amounting to £2,781,417 remains outstanding at 31 March 2022 (2021: £3,291,417) from Palace Capital (Halifax) Limited. Interest
on this loan is charged at a fixed rate of 5% per year. This loan is repayable on demand.
A loan amounting to £4,034,646 remains outstanding at 31 March 2022 (2021: £743,583 creditor) from Palace Capital (Properties)
Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on demand.
A loan amounting to £150,000 remains outstanding at 31 March 2022 (2021: £Nil) from Palace Capital (Northampton) Limited. Interest on
this loan is charged at a fixed rate of 5% per year. This loan is repayable on demand.
154
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 6. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade creditors
Amount owed to subsidiary undertaking
Other taxes
Other creditors
Accruals and deferred income
2022
£’000
168
27,528
278
5
974
28,953
2021
£’000
206
17,776
269
66
842
19,159
A loan amounting to £10,113,143 remains outstanding at 31 March 2022 (2021: £9,373,143) to Palace Capital (Signal) Limited.
No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £Nil remains outstanding at 31 March 2022 (2021: £2,662,519) to R.T. Warren Investments Limited. No interest is
charged on this loan. This loan is repayable on demand.
A loan amounting to £16,314,718 remains outstanding at 31 March 2022 (2021: £4,996,489) to Property Investment Holdings Limited.
No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £1,100,000 remains outstanding at 31 March 2022 (2021: £Nil) to Palace Capital (Liverpool) Limited. No interest is
charged on this loan. This loan is repayable on demand.
7. SHARE CAPITAL
The details of the Company’s share capital are provided in note 21 of the notes to the Consolidated Financial Statements.
8. LEASES
Operating lease payments in respect of rents on leasehold properties occupied by the Company are payable as follows:
Within one year
From one to two years
9. POST BALANCE SHEET EVENTS
There are no post balance sheet events.
2022
£’000
19
–
19
2021
£’000
178
19
197
155
FINANCIALS Officers and Professional Advisors
DIRECTORS
Steven Owen
Interim Executive
Chairman
Matthew Simpson Chief Financial Officer
Richard Starr
Executive Property
Director
Kim Taylor-Smith
Non-Executive
JOINT BROKER
Arden Partners plc
125 Old Broad Street
London
EC2N 1AR
JOINT BROKER
Director
Numis Securities Limited
Mickola Wilson
Non-Executive
45 Gresham Street
London
EC2V 7BF
SOLICITORS
Hamlins LLP
1 Kingsway
London
WC2B 6AN
CMS Cameron McKenna
Nabarro Olswang LLP
1 South Quay
Victoria Quays
Sheffield
S2 5SY
Walker Morris LLP
33 Wellington Street
Leeds
LS1 4DL
Edwin coe LLP
Lincoln’s Inn
2, Stone Buildings
London
WC2A 3TH
Director
Paula Dillon
Non-Executive
Director
SECRETARY
Phil Higgins
REGISTERED OFFICE
25 Bury Street
London
SW1Y 6AL
REGISTERED NUMBER
05332938 (England and Wales)
AUDITOR
BDO LLP
55 Baker Street
London
W1U 7EU
REGISTRAR
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
INVESTOR & PUBLIC
RELATIONS
FTI Consulting
200 Aldersgate
Aldersgate Street
London
EC1A 4HD
BANKERS
Barclays Bank plc
69 Albion Street
Leeds
LS1 5AA
Lloyds Bank plc
25 Gresham Street
London
EC2V 7HN
National Westminster Bank plc
16 The Boulevard
Crawley
West Sussex
RH10 1XU
Santander UK plc
Bridle Road
Merseyside
L30 4GB
156
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022
Glossary
Adjusted EPS: Is adjusted profit before tax less corporation tax
charge on recurring earnings (excluding deferred tax movements)
EPRA occupancy rate: Is the ERV of occupied space divided
by ERV of the whole portfolio, excluding developments and
divided by the average basic number of shares in the period.
residential property.
Adjusted profit before tax: Is the IFRS profit before taxation
excluding investment property revaluations, gains/losses on
EPRA topped-up net initial yield: Is the current annualised rent,
net of costs, topped up for contracted uplifts, where these
disposals, acquisition costs, fair value movement in derivatives,
are not in lieu of rental growth, expressed as a percentage of
share-based payments and exceptional items.
capital value.
Assets Under Management (AUM): Is a measure of the total
market value of all properties owned and managed by the Group.
EPRA vacancy rate: Is the ERV of vacant space divided by ERV
of the whole portfolio, excluding developments and residential
Balance sheet gearing: Is the balance sheet net debt divided by
IFRS net assets.
Building Research Establishment Environmental Assessment
Methodology (BREEAM) rating: A set of assessment methods
and tools designed to help construction professionals understand
and mitigate the environmental impacts of the developments
they design and build. Performance is measured across a series of
ratings: Good, Very Good, Excellent and Outstanding.
Core: Is a property investment management style which adopts a
certain risk appetite growth strategy. Core is typically associated
with a low to moderate risk profile. Core property owners would
have the ability to increase cash flows through light refurbishment
and asset management strategies. These properties tend to be
property.
Equivalent yield: Is the net weighted average income return
a property will produce based upon the timing of the income
received. In accordance with usual practice, the equivalent yields
(as determined by the external valuers) assume rent received
annually in arrears and on values before deducting prospective
purchaser’s costs.
Estimated rental value (ERV): Is the external valuers’ opinion as
to the open market rent which, on the date of valuation, could
reasonably be expected to be obtained on a new letting or rent
review of a property.
IAS/IFRS: Is the International Financial Reporting Standards issued
by the International Accounting Standards Board and adopted by
high quality and well occupied.
the UK.
Dividend cover: Is the Adjusted EPS divided by dividend per share
declared in the period.
Interest cover ratio (ICR): Is the number of times net interest
payable is covered by underlying profit before net interest payable
EPRA: Is the European Public Real Estate Association.
and taxation.
EPRA cost ratio (including direct vacancy costs): Is a
proportionally consolidated measure of the ratio of net overheads
and operating expenses against gross rental income (with both
Investment Property Databank (IPD): A wholly-owned subsidiary
of MSCI producing an independent benchmark of property returns
and the Group’s portfolio returns.
amounts excluding ground rents payable). Net overheads and
operating expenses relate to all administrative and operating
Key Performance Indicators (KPIs): Are the most critical metrics
that measure the success of specific activities used to meet
expenses, net of any service fees, recharges or other income
business goals – measured against a specific target or benchmark,
specifically intended to cover overhead and property expenses.
adding context to each activity being measured.
EPRA cost ratio (excluding direct vacancy costs): Is the ratio
calculated above, but with direct vacancy costs removed from the
LIBOR: Is the London Interbank Offered Rate, a formerly used
interest rate charged by one bank to another for lending money.
net overheads and operating expenses balance.
EPRA diluted EPS: Is EPRA earnings divided by the average
diluted number of shares in the period.
EPRA earnings: Is the IFRS profit after taxation excluding
investment property revaluations and gains/losses on disposals
and changes in fair value of financial derivatives.
EPRA EPS: Is EPRA earnings divided by the average basic number
of shares in the period.
EPRA net assets (EPRA NAV): Are the balance sheet net assets
according to the definitions of the various NAV measures defined
in the EPRA Best Practice Recommendations that came into effect
for accounting periods starting 1 January 2020.
EPRA NAV per share: Is EPRA NAV divided by the diluted number
of shares at the period end.
EPRA net tangible assets (EPRA NTA): Is the NAV adjusted to
reflect the fair value of trading properties and derivatives and to
exclude deferred taxation on revaluations.
157
Like-for-like net rental income: Is the change in net rental income
on properties owned throughout the current and previous periods
under review. This growth rate includes revenue recognition
and lease accounting adjustments but excludes properties held
for development in either period, properties with guaranteed
rent reviews, asset management determinations and surrender
premiums.
Like-for-like valuation: Is the change in the carrying value of
properties owned throughout the entire year.
This excludes properties acquired during the year, disposed of
during the year and capital expenditure
Loan to value (LTV): Is the ratio of principal value of gross debt
less cash, short-term deposits and liquid investments to the
aggregate fair value of properties and investments.
FINANCIALS Glossary CONTINUED
MSCI Inc. (MSCI IPD): Is a company that produces independent
benchmarks of property returns. The Group measures its
Special Purpose Vehicle (SPV): Is a separate legal entity created by
an organisation. The SPV is a distinct company with its own assets
performance against both the Central London Offices Index and
and liabilities, as well as its own legal status. Usually, they are
the UK All Property Index.
Net asset value (NAV) per share: Is the equity attributable to
owners of the Group divided by the number of ordinary shares in
issue at the period end.
Net equivalent yield (NEY): Is the weighted average income return
(after adding notional purchaser’s costs) a property will produce
based upon the timing of the income received. In accordance
with usual practice, the equivalent yields (as determined by the
external valuers) assume rent is received annually in arrears.
Net initial yield (NIY): Is the current annualised rent, net of costs,
expressed as a percentage of capital value, after adding notional
purchaser’s costs.
Net rental income: Is the rental income receivable in the period
after payment of net property outgoings. Net rental income
will differ from annualised net rents and passing rent due to the
effects of income from rent reviews, net property outgoings and
created for a specific objective, often which is to isolate financial
risk. As it is a separate legal entity, if the Parent Company goes
bankrupt, the special purpose vehicle can carry its obligations.
Tenant (or lease) incentives: Are any incentives offered to
occupiers to enter into a lease. Typically the incentive will be an
initial rent free period, or a cash contribution to fit-out or similar
costs. Under accounting rules the value of lease incentives given
to tenants is amortised through the Income Statement on a
straight-line basis to the lease expiry.
Total Accounting Return (TAR): Is the increase or decrease in EPRA
NAV per share plus dividends paid, and this can be expressed as a
percentage of EPRA NAV per share at the beginning of the period.
Total Expense Ratio: Is calculated as total administrative costs for
the year divided by the total asset value in the year.
Total Property Return (TPR): Total property return is a performance
measure calculated by the MSCI IPD and defined in the MSCI
accounting adjustments for fixed and minimum contracted rent
Global Methodology Standards for Real Estate Investment as “the
reviews and lease incentives.
percentage value change plus net income accrual, relative to the
Net reversionary yield (NRY): Is the anticipated yield, which
the initial yield will rise to once the rent reaches the estimated
rental value.
Passing rent: Is the gross rent, less any ground rent payable under
head leases.
Peer Group: A selection of small/medium sized property
companies within the listed real estate sector with a diversified
portfolio.
Portfolio Valuation: The value of the Company’s property
portfolio, including all investment and trading properties as valued
by our independent valuers, Cushman & Wakefield, and assets
held for sale.
Portfolio Value (PV): The value of the investment properties within
the Palace Capital property portfolio as measured by Cushman &
Wakefield. It is referenced in relation the 2018 LTIP’s awarded to
employees in 2018.
Property Income Distribution (PID): A dividend received by a
Shareholder of the principal company in respect of profits and
gains of the Property Rental Business of the UK resident members
of the REIT Group or in respect of the profits or gains of a non-UK
resident member of the REIT Group.
Real Estate Investment Trust (REIT): A UK Real Estate Investment
Trust must be a company listed on a recognised stock exchange
with at least three-quarters of its profits and assets derived from a
qualifying property rental business. Income and capital gains from
the property rental business are exempt from tax but the REIT is
required to distribute at least 90% of those profits to Shareholders.
Tax is payable on profits from non-qualifying activities of the
residual business.
SONIA: Is the Sterling Overnight Index Average, the interest rate
charged by one bank to another for lending money.
capital employed”.
Total Shareholder Return (TSR): Is calculated as the movement
in the share price for the period plus dividends paid in the year,
divided by opening share price.
Value-add: Is a risk appetite growth strategy. Typically associated
with a moderate to high-risk profile. Value-add properties tend
to have low cash flows at acquisition but have the potential to
produce future cash flow uplifts once value has been added.
This could be by taking on larger capital refurbishment projects
to improve the layout and look of the property to ensure rental
increases and capital value enhancement.
Weighted average debt maturity: Is measured in years when each
tranche of Group debt is multiplied by the remaining period to its
maturity and the result is divided by total Group debt in issue at
the period end.
Weighted average interest rate: Is the loan interest per annum at
the period end, divided by total debt in issue at the period end.
Weighted average unexpired lease term (WAULT): Is the average
lease term remaining to first break, or expiry, across the portfolio
weighted by rental income. This is also disclosed assuming all
break clauses are exercised at the earliest date,
as stated.
WiredScore: Wired Certification is a commercial real estate
rating system that empowers landlords to understand, improve,
and promote their buildings’ digital infrastructure. Connectivity
is measured across a series of ratings: Platinum, Gold, Silver
and Certified.
158
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2022 Newcastle
CONTACT
25 Bury Street, St James’s
London, SW1Y 6AL
palacecapitalplc.com
T: +44 (0)20 3301 8330
E: info@palacecapitalplc.com
York
Leeds
Halifax
Manchester
Liverpool
Coventry
Leamington Spa
Kettering
Northampton
Milton Keynes
Beaconsfield
Maidenhead
Avonmouth
Newbury
Winchester
Farnborough
Salisbury
Fareham
Southampton
Gosport
Dartford
Sutton
East Grinstead
Burgess Hill
Brighton
Exeter
Plymouth